Companies turn to spin offs to unlock value

• Time Warner%27s decision to spin off the Time publishing unit is the latest in a spinoff craze
• The number of spinoffs is off to good clip in 2013 as companies look to push stocks prices up
• Spinoffs have been lucrative for investors in the short and long term

Companies are finding one of the best ways to unlock the value of under-appreciated assets is to kiss them goodbye.

Spinoffs, financial moves where companies jettison a unit into a stand-alone business, are catching on as CEOs look for ways to keep their stock prices moving higher. With other strategies such as cost cutting played out, spinoffs are a quick and easy way for companies to gain appreciation with investors, says Joe Cornell of Spin-Off Advisors.

In a spinoff, a company ejects a business, its products, employees and management into a company with its own separately traded stock — and therefore its own shareholders to answer to. "Companies with assets with value not being reflected are asking, 'Wouldn't it be better to spin this off?' " Cornell says.

Time Warner's decision Wednesday to spin off its magazine division, home to iconic names such as Time and Sports Illustrated, is the latest example, coming just months after News Corp. disclosed similar plans for its publishing unit.

So far in 2013, there have been nine spinoffs completed, putting it on pace to be the busiest year for such deals in awhile, says Spin-Off Advisors, easily topping the three spinoffs at this point last year.

A strong year for spinoffs would reverse a rocky stretch for the deals as companies instead focused on cost cutting as a way to improve returns. Last year's total of 37 spinoffs was down from 47 in 2011, though up from just 20 in each 2010 and 2009, Spin-Off Advisors says.

The environment is ripe for spinoffs due to a variety of reasons, including:

• Investors' appreciation. Time Warner's success with two past spinoffs probably urged it to do more. Shares of AOL (AOL) are up 80% and shares of Time Warner Cable (TWC) have risen 261% since their spinoffs from Time Warner in 2009. The Bloomberg Spin-Off Index, which tracks the performance of all spun-off stocks, is up 47% the past 12 months, topping the 14% gain of Standard & Poor's 500 14% over the same period. "Spinoffs have been great investment opportunities," says Doug Sandler of RiverFront Investment Group.

• Strategic payoff. Academic research has shown spinoffs are good for shareholders of the parent company and the spinoff itself, especially when the business being spun off is a distraction, says Jim Rosenfeld, professor of finance at Emory University. Over the long term, the value of the parent company typically rises 3% on the announcement of a spinoff. Time Warner (TWX) shares rose 2.4% Thursday on its news.

• Strong stock market. Once companies undergo a downturn, pare costs and assess their structure, that's usually the time they start to consider spinoffs, Cornell says. The deals are easier to pull off when the market sentiment is bullish, as it is now, Rosenfeld says. And that's why he thinks more companies will soon jump on the spinoff craze. "Spinoffs follow periods of high market activity," he says. "There are definitely more to come."