Will the US stock market usher in a wave of spin-offs? Taking history as a mirror, the stock price of companies tends to outperform the market after a breakup.

A report by Trivariate Research shows that by 2025, the pace of corporate spin-offs in the United States will accelerate, and historically, newly established companies will bring significant returns to investors. Data compiled by Trivariate shows that stocks of companies spun off from existing companies often outperform the S&P 500 index by an average of 10% in the following 18-24 months. Meanwhile, according to a report released last month, in the second year after the spin-off, the performance of the remaining entity is consistent with the S&P 500 index. Several factors are expected to further drive this trend this year: a series of successful spin-offs recently, increasing pressure from activist investors, and increased M&A activity that may require spin-offs to meet regulatory expectations. FedEx Corporation (FDX.US) has announced plans to spin off its freight division within the next 18 months. Trivariate Research founder Adam Parker stated, "The strong performance of spun-off companies can serve as a barometer for management teams seeking successful avenues to unlock value." There is ample evidence supporting the benefits of this action. The Bloomberg US Spinoff Index rose 62% last year, composed of companies spun off in the past three years. Data shows that while spin-off transactions may underperform the so-called residual companies in the first five trading days after completion, their performance averages 12% higher than residual companies in the first 400 trading days. Last year, eight spin-offs were completed in the United States, including GE Vernova (GEV.US) separated from GE Aerospace (now GE Aerospace (GE.US)). Since the completion of the spin-off, GE Vernova's stock has achieved a return of 163%, while GE Aerospace's stock has risen by 27%. Another example is Atmus Filtration Technologies (ATMU.US), which achieved a return rate of 51% after being separated from Cummins Inc. (CMI.US), while Cummins Inc.'s stock increased by 33% post-split. Pressure from activist shareholders Jim Osman, founder and CEO of special situations research firm Edge Group, believes that one of the biggest driving factors may be increasing pressure from activist investors. Osman wrote in an email, "With activist investors ramping up their investment efforts, we expect a significant increase in corporate spin-offs by 2025. This trend will not only reshape industries but also create significant value for proactive investors who know where to look." Honeywell International Inc. (HON.US) is a strong example. The industrial conglomerate is exploring the spin-off of its aerospace business in response to calls for separation from Elliott Investment Management. Bloomberg analyst Karen Ubelhart wrote, "If Honeywell International Inc. follows the proposal of activist shareholder Elliott Investment Management to spin off its aerospace division, the company's enterprise value could increase by up to $32 billion." According to Trivariate's data, the industries most commonly seeking spin-offs are industrial, technology hardware, and energy. The performance post-spin-off also depends on the quality of the parent company. Researchers define the quality of the parent company as having high profit margins, growth in free cash flow, low debt, and low short interest. Interestingly, Trivariate found that so far, the highest-quality remaining entities involved in spin-offs have performed the worst, trailing the market by an average of 15% in the first year.