Wall Street loves a good spinoff, and although this is probably due to the fees it generates, it can also be an opportunity for investors to buy into a business that may have been previously undervalued. You might think that the parts can't be greater than the whole, but value is frequently realized in buying spinoffs, and there are two recent ones that bear further research.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Drilling Spinoff
In the energy sector, Pride International (NYSE:PDE) just completed its spin off of 20 of its mat-supported jack-up rigs into a company called Seahawk Drilling (Nasdaq:HAWK). Shareholders of Pride International received one share of the new company for every 15 shares that they owned. Seahawk Drilling will have 11.6 million shares outstanding, and at the opening day price of $25.42, this new driller will have a market capitalization of $294 million. Some parent companies keep part of the new company, as a way to maintain control, but Pride International decided not to go this route and will have no ownership in Seahawk Drilling.

The reason for the spinoff was a simple one. Pride International is keeping its more valuable jack-up rigs and drill ships that can work in the deep water area, and wants to focus exclusively on that segment. Of course, this is not exactly encouraging to the new shareholders of the mat-supported jack-up segment, and there should be some weakness in the new stock as large institutional investors adjust portfolios.

Learning from the Past
(NYSE:RIG) did something similar back in 2004, when it sold part of its shallow water segment in an initial public offering (IPO). TODCO eventually became completely independent from Transocean, and was purchased by Hercules Offshore (Nasdaq:HERO). Investors in the new Seahawk Drilling might take comfort in knowing that despite the motley collection of assets that TODCO had, shareholders received a tidy premium in the Hercules Offshore purchase.

Healthcare Spinoff
Cardinal Health (NYSE:CAH) is spinning off of its former critical care and medical technologies and services segments. The new company called CareFusion Corporation will start trading on September 1, 2009, and will have the benefit of being included in the S&P 500 index.

Cardinal Health's rationale for the separation is based on the two sets of businesses having different product lines, distribution channels and serving different geographic areas. Cardinal Health will retain less than 20% ownership of CareFusion Corporation, and will liquidate the balance within two years.

Bottom Line
Spinoffs can create investment opportunities for those who are willing to do research into these types of deals, and the Pride International and Cardinal Health spin offs are worth a further look. (To learn more, see Parents And Spinoffs: When to Buy And When To Sell.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center