When I was in business school, I had one of those moments that stick with you forever. I attended a talk by a successful hedge fund manager, and he spoke about spinoffs—not just as a strategy but as an art form in creating value where most people don’t even bother to look. That conversation sparked a fascination that has stayed with me throughout my career. Spinoffs have become one of my favorite subjects, and I’ve talked about them in various contexts on my blog and during speaking engagements. Today, I want to explore another angle of why spinoffs are such powerful catalysts for entrepreneurship and value creation.
Think about a spinoff as a startup that has been gifted an advantage—a running start that most new ventures can only dream of. Instead of starting from scratch, a spinoff has an existing business model, revenue, and often, a dedicated customer base. It's like being handed the keys to a car that's already on the highway, instead of starting from zero. And yet, it gets the flexibility and independence that comes with being a new entity, separate from its parent.
This brings us to the core of why spinoffs are special. Within a conglomerate, different divisions compete for resources—talent, funding, and executive attention. When a promising segment is spun off, it finally gets to take center stage. It’s no longer a side project, secondary to the conglomerate’s main priorities. Instead, it’s independent and accountable only to itself and its shareholders. And that accountability brings clarity and opportunity.
Take Zoetis, for example. In 2013, Pfizer spun off its animal health division into a new company called Zoetis. Pfizer allowed Zoetis to become its own entity, focusing solely on animal health products and services. Freed from the constraints of the broader pharmaceutical business, Zoetis was able to grow rapidly, developing innovative animal health solutions and expanding its market reach. Since the spinoff, Zoetis has more than doubled its revenue, and its market value has climbed to over $80 billion today. This illustrates how spinoffs can empower specialized companies to flourish by focusing on what they do best.
But it's not just about stock prices or market value. It’s about the spirit of entrepreneurship that these newly liberated companies embody. After a spinoff, you often see a renewed culture—a sense of ownership and empowerment within the new management team. The executives of the spun-off entity, who may have been just divisional heads before, now find themselves fully in charge, with the autonomy to steer the business toward growth and innovation. They have skin in the game, often in the form of stock options, aligning their personal success with the company's success.
Consider the recent spinoff of DXC Technology from Hewlett Packard Enterprise in 2017. DXC Technology became an independent company, focusing entirely on providing IT services and consulting. This allowed DXC to concentrate on building digital transformation solutions for clients without being tied to the broader, more hardware-focused mission of HPE. The spinoff gave DXC the flexibility to partner with various cloud providers and invest heavily in the digital services market, positioning itself as a leader in IT consulting and transformation.
Spinoffs create value because they liberate potential. The corporate strategies and financial structures of big conglomerates, while often stable, can stifle innovation. They’re designed to manage risk, not chase the kind of transformative opportunities that require focused risk-taking. By unleashing smaller, specialized entities, spinoffs foster a culture of entrepreneurship that often results in new products, new markets, and, ultimately, wealth creation for investors.
So, what does this mean for us, as investors or advisors looking for opportunities? I see spinoffs as opportunities that sit somewhere between the safety of an established company and the exciting upside of a startup. These are not just theoretical gains—they’re often backed by real value, and the data proves it. Historically, spinoff companies have outperformed their parent companies and the broader market by significant margins in the first few years of independence.
The beauty of investing in spinoffs is that you get a unique combination of factors: a management team with everything to prove, a business model with existing traction, and a fresh focus that attracts new capital and talent. It’s capitalism at its best—the entrepreneurial spirit taking charge of its own destiny, free from bureaucratic constraints.
Spinoffs are capitalism unleashed—giving birth to new leaders, fostering a culture of entrepreneurship, and creating opportunities for those who are willing to look where others aren’t. If you’re looking for companies with a hunger to grow, a chip on their shoulder, and the flexibility to adapt—spinoffs are a place to start. Capitalism loves a good story of independence and growth. As investors, it’s up to us to read between the lines, spot that potential, and act on it.