Special Situations: How to Profit from Mergers, Spin-Offs, Turnarounds and More

What a topsy-turvy market! We haven’t seen such big swings in the markets since the COVID pandemic, when the Dow Jones Industrial Average lost 2,997 points on March 16, 2020!

Wall Street has been on an emotional rollercoaster in 2025 but has mostly gained back its earlier losses.

That’s great news for investors, but the constant angst is very wearing—especially on folks who are looking forward to a near-term retirement—many who are long-term investors.

Now, most of you know that I am in that category—I am an adamant long-term investor. But that doesn’t mean that I ignore shorter-term opportunities to spice up the gains in my portfolio. And that’s what I want to talk to you about this month.

Don’t worry; these are not “hot” stock tips or “flash-in-the-pan” speculative ideas. They are tried-and-true strategies, based on specific catalysts, that—with a bit of research—can pay off handsomely.

7 Strategies That Can Boost Your Portfolio Gains

Over my decades of investing, I’ve discovered potential for gains lurking in areas that many investors don’t pay enough attention to but that can be highly profitable:

• Mergers & Acquisitions
• Initial Public Offerings (IPOs)
• Spin-Offs
• Stock Buybacks
• Special Dividends
• Private Equity Buyouts
• Turnarounds

Let’s take them one by one:

Mergers & Acquisitions (M&A) on the Rise

M&A activity can be a boon for investors—especially if you own shares of the company being acquired. Historical gains have averaged between 25% and 30%, with some going as high as 50%.

According to S&P Global, merger and acquisition activity—which has been depressed since 2020—is showing signs of recovery. We saw the highest deal volumes ($1.1 trillion) since 2022 and the highest number of deals (in the fourth quarter of 2024) since the first quarter of 2023.

The 5 Largest Deals of 2024

As for sectors, activity centered mostly around the Financials, Materials, and Industrials.

For 2025, the landscape has changed somewhat, with the new presidential administration. For example, clean energy is out; oil companies are in. Public infrastructure is probably not happening, but construction of data centers, chip and automobile manufacturing are getting ripe for the picking. And I think there will be many opportunities in biopharma and artificial intelligence (AI).

Here are some of the names being bandied about as potential acquisitions:

• Catalyst Bancorp, Inc. (CLST)
• Northeast Community Bancorp, Inc. (NECB)
• Expedia Group, Inc. (EXPE)
• BioMarin Pharmaceutical Inc. (BMRN)
• The Hershey Company (HSY)

Of course, I don’t know if any of these will happen, but if you already own one or more of these stocks, keep your eyes peeled.

It’s important to note that just because they are possible takeover targets, that doesn’t make them sure winners. But I offer them as ideas for you to review and determine if they fit into your investment strategy and goals.

Lastly, if you’d like to keep on top of the M&A business, you can find more comprehensive information at S&P Global, DealRoom, and the Institute for Mergers, Acquisitions & Alliances.

Initial Public Offerings (IPOs) Are Heating Up

The IPO market last saw a banner year in 2021, when Deloitte reports that $142.4 billion was raised. Last year, the total was $29.6 billion, but the prospects for the 2025 IPO market are much better—with 73 new issues filed so far, 32.7% more than last year.

As you can see, the largest number of IPOs filed in the first quarter of 2025 were in the Healthcare sector (35%), followed by 23% in the TMT (Technology, Media, and Telecommunications) sector.

These three top IPOs debuted last year and have deepened investors’ pockets:

NANO Nuclear Energy Inc. (NNE)—up 525%
Reddit, Inc. (RDDT)—up 267%
LandBridge Company LLC (LB)—up 239%

According to PwC, “In 2024, sponsor-backed IPOs delivered an average return of 42% since their debut.” That’s pretty impressive—considering that the S&P 500 delivered an average 15.3% return to investors.

But…not so fast.

Sure, you could get really, really lucky and buy the shares of an IPO that skyrocketed the first day, sell the shares at the end of the day, and walk away with a pocketful of money. It does happen, but not normally to regular investors like you and me. Instead, we need to rely on old-fashioned gumshoe work, viewing the IPO issue as we would any other investment, and asking ourselves whether this stock is worthy of adding to our portfolios.

That means a bit of analysis, starting with the company’s financials.

Is it profitable? Does its cash flow cover its outlays? Does it have substantial assets (especially cash) and reasonable debt, in case of a downturn in the economy, its sector, or the company itself?

If the financials look good, the next step is to examine the company’s products or services and determine if they meet a real, ongoing need. You can see that fairly easily by looking at its past growth and future projections, which should be included in the prospectus in the pro-forma financial statements.

And if the company passes your tests, and you buy the shares, you may want to wait a bit to buy in, even if you could procure shares on the first day of trading, as prices of IPOs often fall precipitously shortly after the stock debuts. And many continue to decline.

Here’s the stats: According to Nasdaq, only about 60%-70% of IPOs trade above their initial price after one year. On average, most either outperform or underperform the market by more than 10%. And HDFC Sky reports that, “The success rate tends to diminish over the long term, with only about 40% of IPOs trading above their issue price after five years.”

Bottom line, it pays to be wary of IPOs—at least until the shares have been trading awhile. And it’s often difficult for individual investors to “get in” on an IPO. That’s because brokerage firms generally reserve most of the shares for large institutions and the well-heeled clientele of the underwriting firms. Your first point of contact is your broker to see if the company will have any shares to distribute to their clients. Next, call the Investor Relations department of the company going public to find out if it is going to issue any shares directly to the public, and lastly, you can try contacting the underwriters of the stock and ask how they intend to distribute shares.

If you are interested in dipping your toes into the IPO market, here’s a list of upcoming initial public offerings:

You can also find more upcoming IPOs at Nasdaq and MarketWatch.

Just remember, while the data shows there have been plenty of winners in the IPO market, investors should tread carefully. Remember that the key to successful investing is buying the right stocks at the right price: Fundamentally strong companies that have the ability, strategy, and good management to continue growing over the long term.

2025 Is Set to Be a Good Year for Spin-Offs

When stock markets are bullish, that usually means that corporate earnings are also very positive. And when that occurs, companies often consider selling off parts of their organizations, frequently in the form of a spin-off. A spin-off is simply when a division or subsidiary is separated from its parent company and begins its life as an independent stock.

Since 1985, corporations have been spinning off subsidiaries at an average rate of about 34 per year, according to DataTrek Research. But recently, those numbers have spiked. In 2023, there were 211 spin-offs, the third-highest in 10 years, and in 2024, 237 global spin-off IPOs were announced.

All this spinning off is very good for investors, as many studies have reported that spin-off stocks average a return that is 10% higher than the S&P 500 Index. But recent years have been even better. The S&P U.S. Spin-Off Index has returned 19.91% annually to investors over the past three years.

A recent report by Trivariate Research says, “The pace of spinoffs in the U.S. is set to accelerate in 2025.”

There are two primary reasons for this: Rising pressure from activist investors and expectations that increased mergers and acquisitions activity may require separations to satisfy regulators.

The industries expected to see a boost in spin-off activity include:

Industrials: It’s been reported that Honeywell International (HON) is exploring spinning off its aerospace business and is also planning to separate into three independent entities: Automation, Aerospace, and Advanced Materials.
Technology Hardware: DuPont de Nemours (DD) intends to spin off its Qnity electronics business in the fourth quarter.
Media: Comcast (CMCSA) is spinning off its NBCUniversal cable networks (excluding the broadcast network and Peacock) into Versant, a new company.
Consumer Products: Unilever (UL) is spinning off its ice cream business.
Healthcare: McKesson (MCK—one of our Cabot Stock of the Month recommendations) is spinning off its Medical-Surgical Solutions unit.
Financial Services: Sony (SONY) plans to spin off its financial services unit, SFGI.

But investors should know that not all spin-offs are created equal. Just like with any equity, investors must approach spin-offs with an analytical eye. Many spin-offs are winners, but others aren’t.

First, you need to determine why the spin-off is occurring. There are a couple of good reasons:

1. Activist investors who are urging companies to unload non-related business divisions that they believe are holding a company back.
2. Spin-offs can unlock value in a company, making the sum of the parts greater than the whole. They often allow management to bring laser focus on individual units that have gotten lost in the shuffle of the conglomerate, giving them a chance to grow into viable businesses. And that can provide opportunities for investors to buy bargain-priced companies with fabulous potential.

There are several catalysts that boost spin-off prices:

• Management is more incentivized by way of stock options and shares.
• The company’s leaders have more leeway to cut costs and to begin new enterprises.
• Focus on a pure-play company can uncover significant investment potential, as they are easier for investors to understand.

Spin-offs are often undervalued because investors may sell the new company if it doesn’t fit their particular investments strategies or disciplines. And often—due to their mandates for investing in stocks of specific market caps, index funds retain the parent shares and dump the spin-off, which can undervalue the spun-off stock by as much as 20%.

Investors need to know that there’s no guarantee that the spin-off will blossom. The spin-off companies tend to be higher-beta stocks that underperform in weak markets and outperform in strong markets, making them more volatile and better in bull markets than in a bear environment.

It’s also worth noting that many spin-off stocks sell off right after the separation. But that discontinuity generally goes away over the longer term.

To evaluate a spin-off, here are a few questions to ask:

1. Are the interests of the managers of the spin-off aligned with yours? Are they incentivized through stock ownership to continue focusing on enhancing shareholder value?
2. What’s the reason for the spin-off? Evaluate the company’s debt and assets to make sure the “bad stuff” isn’t being dumped into the new company.
3. Look at operating income compared to net working capital, less cash, to see if the spin-off has strategic advantages.
4. Valuation, valuation, valuation—is the spin-off headed for the starting gate with a reasonable valuation? You may have to do a little digging here to compare the spin-off’s business with its peers to see if a valuation advantage exists.

Lastly, you can go to the Securities & Exchange Commission and look at the company’s 10-12B form. The SEC requires that companies planning to separate file pro-forma statements so investors can take a look-see at what the spun-off company might look like.

Spin-offs are so popular, there is an exchange-traded fund that tracks them: Invesco S&P Spin-Off ETF (CSD), which investors can buy to easily get in on the action. That ETF has gained 27.61% in the past 52 weeks.

So, how does one invest in spin-offs? There are two alternatives: invest in a spin-off exchange-traded fund (ETF) like the one above, or invest in a stock once it announces an upcoming spin-off.

The next question is, how do you find spin-off stocks? Well, you can search through the 10-12B forms on the Securities and Exchange Commission (SEC) site. Or you can look at any number of websites, including Stock Spinoff Investing (this is run by Rich Howe, a former Cabot analyst) or Inside Arbitrage.

I’ve also found this calendar of recent spin-offs.

2025 Stock Spinoffs

If you have a few extra dollars and want to try your investment hand at spin-offs, this might be a good place to start.

Stock Buybacks Set a Record Last Year

According to YahooFinance, there was $943 billion in stock buybacks in 2024, and many originated from mega-cap companies, including Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and NVIDIA (NVDA)—all tech companies. In fact, 27% of last year’s buybacks came from information technology businesses. It’s expected that stock buybacks will surpass $1 trillion this year, primarily from Big Tech, Energy & Basic Materials, Regional Banks, and Financials & Technology.

There’s an ongoing debate—and has been, for years—about which is better: stock buybacks or dividends. I’m not going to tell you there is a definitive answer to that question; instead, I think there’s a case for both.

A stock buyback is simply when a company declares that its board has authorized the repurchase of a certain amount of its own stock. Investors like stock buybacks because they reduce the number of outstanding shares and also enhance the company’s per-share profitability measures, such as EPS, Return on Equity, and cash flow per share. Over time, those better ratios will often lead to higher share prices, adding to investors’ pocketbooks. And, very importantly, the buyback isn’t taxed until the stockholder sells his shares.

From a corporate standpoint, buybacks are optional but are often done for two reasons:

1. The company has excess cash. If excess cash is the impetus, the company has the choice of what to do with its extra cash—it is not obligated to repurchase shares. It can just plow the money back into the company.
2. Its share price—in its estimation—is cheap. If the company’s C-suite thinks the shares are undervalued, they may use buybacks as a way to (hopefully) improve the share price.

The timing of a buyback is also important. Companies want their buybacks to look like a show of strength—confidence in the company’s future. And while share prices can—and often do—rise after a buyback, if, for some reason, they took a dive, the buyback may be considered a failure.

And if the shareholders believe the company should be investing its excess cash back into the growth of the company instead of repurchasing shares, the buyback could backfire.

A few years ago, Warren Buffett, in his annual letter to Berkshire Hathaway’s shareholders, had this to say about buybacks:

He “believes buybacks are beneficial to shareholders as they provide a lift to per-share intrinsic value.” He went on to comment, “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

And while I love Warren Buffett, it is true that there are some disadvantages to a stock buyback:

• The company doesn’t see a better use of its cash, such as buying the competition or investing in new products or technology. That may raise some questions as to the company’s confidence in future growth—and for investors, the appreciation of their stock.
• The buyback process can be time-consuming and expensive, as a company must provide stock exchanges and regulators with a stack of disclosures, and usually, it also has to hire investment bankers.
• In 2022, a 1% excise tax was levied on buybacks on companies repurchasing more than $1 million in stock. There are a few exceptions, such as REITs.

Also, a company might use stock buybacks to camouflage the number of shares it’s handing out to its top executives in the form of stock options. The buybacks may balance out the options issuance, keeping the total number of shares constant, and essentially not benefiting the shareholders.

In contrast, dividends are issued for a couple of reasons:

• To attract new investors with steady cash flow.
• To reward existing investors with occasional dividend increases, and sometimes special dividends.

Dividends are incredibly important to many investors. In fact, according to Morningstar and Hartford Funds, research shows that since 1940, dividends have accounted for roughly 34% of the total return of U.S. equities. And dividend increases have been no slouch recently, either. Janus Henderson recently reported that dividends paid by companies around the world hit a record $1.75 trillion last year, up 6.6% from 2023.

You might consider the dividends that your investments pay as a sort of profit-sharing plan. But there is a downside—dividends are paid out after tax by corporations, and then shareholders are taxed when they receive them. That’s called double taxation.

The advantages of dividends are obvious—free money, and if you hold those stocks in a retirement plan, you can defer the taxes until your golden years, when your tax bite will probably be lower.

Another potential downside to dividends is that when an economy hits a rough spot and earnings decline, so do dividends. That’s what happened in 2022, when 232 companies decreased their payouts. And in severe earnings droughts, dividends can be suspended, such as during the early days of the pandemic in 2020, when more than 190 companies suspended their dividends.

Which method rewards shareholders the most?

It’s often a toss-up, but as you can see in the following graph from Yardeni Research, over the last few years, buybacks have been returning more to investors.

I happen to love both—if they are done for the right reason. And as the economy strengthens, more businesses will likely boost their dividends and their stock repurchases.

You can find upcoming stock buybacks at MarketBeat.

Just remember, a buyback—or lack thereof—is not the primary reason to buy or sell a stock. Further investigation is always needed.

Special Dividends: A Quick Way to Cash In

A special dividend is just what it sounds like—a payment made to shareholders that is separate from its regular dividend cycle. Most of the time, it is a one-off. However, that’s not always the case.

One of my best special dividend buys was a few years ago when I read about a $4 special dividend that was going to be paid by Saks Incorporated (no longer a public company). I wasn’t a Saks shareholder at the time, but since the shares were trading in the teens, I figured an additional $4 would be a pretty nice return.

I bought the stock and cashed it in as soon as I received the special dividend. However, one of my friends decided to hold onto his shares for a while and was again rewarded with a $4 per share special dividend a few months later. Not too shabby!

There are several reasons why a company might want to pay a special dividend to its shareholders, including:

• Corporate restructuring, with asset sales. That was the reason for Saks’ first special dividend—the company sold off its Bon-Ton stores.
• Loads of cash on hand—Saks’ reason for its second special dividend.
• Strong earnings—Costco paid a $10 special dividend in 2020, and Dillard’s paid out $25 per share last year!
• Tax policy. For example, if a lower-than-current-dividend tax rate is expiring—such as in 2012, when the dividend tax rate was 15%.

Investors should note that special dividends can have tax implications. Most regular dividends are taxed as qualified dividends or long-term capital gains. However, special dividends may be a combination of capital gains, ordinary income and returns of capital. Most are considered return of capital, but pay attention to the 1099-DIV forms you receive from your investments, so that you know exactly how the special dividend is being treated. Of course, you should have some idea prior to tax time because the company should advise shareholders at the time of the dividend.

A special dividend often causes share prices to decline. Because special dividends decrease the company’s book value—at least temporarily—you might see the share price decline upon the payment of the dividend. That happened with Saks, too, but I was able to sell my shares immediately upon the dividend payment.

Honestly, I was lucky with the Saks’ special dividend—I made a lot of money in a short period of time. But realistically, a special dividend is a starting place to determine if a stock is the right one for you. As I said at the beginning of this article, I’m a long-term investor, and the majority of my recommendations are ideas for the long-term.

Some of you may remember my previous newsletter, Wall Street’s Best Investments, a compilation of recommendations from leading investment newsletter analysts. One of those folks was Ian Wyatt, who writes a number of newsletters.

I recently took a look at his Income Confidential letter, which listed the following upcoming Special Stock Dividends

Ian is a great source for this information. You can find him at Wyatt Research.

You can also see a list at Dividend.com.

Private Equity Buyouts

A private equity deal occurs when a firm buys out a non-public company in hopes of improving its value so the acquiring company can eventually sell it for a profit.

Prior to last year, private equity dealmaking had been on a downward trend for a couple of years. But 2024 changed all that. Dealmaking rose 14%, to $2 trillion, according to McKinsey. And mega-deals (over $500 million) were the stars of the show.

Some of the largest deals included:

• AirTrunk (Blackstone): $16.3 billion
• Smartsheet (Blackstone/Vista Equity): $8.4 billion
• PowerSchool (Bain Capital): $5.6 billion
• Perficient (EQT): $3.0 billion
• R1 RCM (TowerBrook/CD&R): $8.9 billion
• Truist Insurance Holdings (CD&R/Mubadala/Stone Point): $15.5 billion
• Instructure (KKR): $4.8 billion

As you can see, last year, the Technology and Energy sectors led the private equity deals.

But according to Vistage.com, we’ve just scratched the surface as private equity firms (PE) still have “$3.7 trillion of dry powder on the sidelines.”

And while corporations have been somewhat scaling back their purchase goals, due to economic uncertainty, the PE firms are upping their ante, paying premiums as high as 38% of the transaction value.

That spells opportunities, especially as MergerMarket reports that 64% of private equity investors “plan to make four or more acquisitions in the next year, compared to 34% of corporates.”

You may be asking, how can an individual investor participate in these private equity deals? And while a few years ago, that may have been all but impossible, today, you actually have several entrées into this marketplace:

Direct Investment (Accredited Investors), but you generally need an income of at least $200,000 (or $300,000 joint) or a net worth of $1 million.

Funds of Funds, which buy shares in other funds. Some of the largest may be found at: Hamilton Lane, HarbourVest Partners, Pathway Capital Management, Fort Washington Investment Advisors, AlpInvest Partners, and Adams Street Partners. Please note that you may incur additional fees with these funds.

Private Equity ETFs: You can find a list at this site from VettaFi. These ETFs also come with additional fees.

Crowdfunding provides funds from the sale of securities such as shares, debts, and convertible notes. You can find more information, as well as a list of crowdfunding platforms, courtesy of the Corporate Finance Institute.

Annual returns on private equity over the past 25 years averaged 13.1%, compared to the 8.6% average of the S&P 500 during the same period. However, investing in private equity is not without risk, especially since you usually have to put up a high initial investment, fees are fairly expensive, and you will have less transparency than you would find in publicly traded companies.

A Strengthening Economy Bodes Well for Companies with Turnaround Potential

A turnaround is simply the financial recovery and rebound of a poorly performing company. And according to Cabot’s turnaround expert, Clif Droke, Chief Analyst of the Cabot Turnaround Letter, the key to turnaround profits is “Separating those companies that will recover and return to favor from those that won’t.”

Here are Clif’s 10 rules:

1. Look For Solid Core Business
2. Look for Well-Known Products or Brands
3. Compare Cash Flow to Obligations
4. Look for Management Changes
5. Look at Who Owns the Company’s Stock
6. Look for Special Problems that Do Not Affect Core Operations
7. Pay Attention to Economic and Market Conditions
8. Watch for Companies Emerging From Bankruptcy
9. Watch Media Headlines for Opportunities
10. Compare Common Stocks, Preferred Stocks & Bonds.

Currently, there are several catalysts that bode well for companies struggling to turn their businesses around, including:

• Declining interest rates, which should encourage debt reduction
• A softening in regulatory requirements
• Falling inflation
• Rising M&A activity
• Increasing AI opportunities to improve efficiency and cost reduction.

Sectors that look ripe for finding turnaround opportunities include: Technology, Media & Telecommunication (due to dealmaking and AI adoption), Financial Services (M&A), and Consumer and Retail. This sector is expected to be focused on large carve-outs (divestitures of product lines, divisions, or business units).

Of course, you always run the risk that the company does not successfully complete a turnaround. Like any of the other previously mentioned strategies, you’ll need to do some research and analysis to determine if an investment is merited.

I hope that these seven strategies will help you enhance your portfolio returns. As always, these are just ideas for further research to determine how they may fit with your personal investment strategy and goals.