Spinoff

Spinoff

When a company creates a new independent company by selling or distributing new shares of its existing business, this is called a spinoff. A company may conduct a spinoff to focus its resources and better manage the division that has more long-term potential, or if a portion of the business is headed in a different direction and has different strategic priorities from the parent company, or if it has been looking for a buyer to acquire that segment of its business but failed to find one. A corporation creates a spinoff by distributing 100% of its ownership interest in that business unit as a stock dividend to existing shareholders. A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. When a company creates a new independent company by selling or distributing new shares of its existing business, this is called a spinoff. Both the parent and the spinoff tend to perform better as a result of the spinoff transaction, with the spinoff being the greater performer.

A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.

What Is a Spinoff?

When a company creates a new independent company by selling or distributing new shares of its existing business, this is called a spinoff. A spinoff is a type of divestiture. A company creates a spinoff expecting that it will be worth more as an independent entity. A spinoff is also known as a spinout or starburst.

A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.
The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.
When a corporation spins off a business unit that has its own management structure, it sets it up as an independent company under a renamed business entity.

Understanding Spinoffs

A parent company will spin off part of its business if it expects that it will be lucrative to do so. The spinoff will have a separate management structure and a new name, but it will retain the same assets, intellectual property, and human resources. The parent company will continue to provide financial and technological support in most cases.

A spinoff may occur for various reasons. A company may conduct a spinoff so it can focus its resources and better manage the division that has more long-term potential. Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs. For example, a company might spin off one of its mature business units that are experiencing little or no growth so it can focus on a product or service with higher growth prospects.

Alternatively, if a portion of the business is headed in a different direction and has different strategic priorities from the parent company, it may be spun off so it can unlock value as an independent operation.

A company may also separate a business unit into its own entity if it has been looking for a buyer to acquire it but failed to find one. For example, the offers to purchase the unit may be unattractive, and the parent company might realize that it can provide more value to its shareholders by spinning off that unit.

Both the parent and the spinoff tend to perform better as a result of the spinoff transaction, with the spinoff being the greater performer.

The downside of spinoffs is that their share price can be more volatile and can tend to underperform in weak markets and outperform in strong markets. Spinoffs can also experience high selling activity; shareholders of the parent may not want the shares of the spinoff they received because they may not fit their investment criteria. The share price may dip in the short term because of this selling activity, even if the spinoff’s long-term prospects are positive.

A corporation creates a spinoff by distributing 100% of its ownership interest in that business unit as a stock dividend to existing shareholders. It can also offer its existing shareholders a discount to exchange their shares in the parent company for shares of the spinoff. For example, an investor could exchange $100 of the parent’s stock for $110 of the spinoff’s stock. Spinoffs tend to increase returns for shareholders because the newly independent companies can better focus on their specific products or services.

Spinoffs are a common occurrence; there are typically dozens each year in the United States. Recent examples include the 2020 spin-off of Smith & Wesson from American Outdoor Brands, or the separation of PayPal from its parent company, eBay.

Why Would a Company Initiate a Spinoff?

The main reason for a spinoff is that the parent company expects that it will be lucrative to do so. Spinoffs tend to increase returns for shareholders because the newly independent companies can better focus on their specific products or services. A company may conduct a spinoff to focus its resources and better manage the division that has more long-term potential, or if a portion of the business is headed in a different direction and has different strategic priorities from the parent company, or if it has been looking for a buyer to acquire that segment of its business but failed to find one. 

How Is a Spinoff Done?

A corporation creates a spinoff by distributing 100% of its ownership interest in that business unit as a stock dividend to existing shareholders. It can also offer its existing shareholders a discount to exchange their shares in the parent company for shares of the spinoff. For example, an investor could exchange $100 of the parent’s stock for $110 of the spinoff’s stock. The spinoff will have a separate management structure and a new name, but it will retain the same assets, intellectual property, and human resources. The parent company will continue to provide financial and technological support in most cases.

What Are the Disadvantages of a Spinoff?

The downside of a spinoff is that its share price can be more volatile and can tend to underperform in weak markets and outperform in strong markets. Spinoffs can also experience high selling activity; shareholders of the parent may not want the shares of the spinoff they received because they may not fit their investment criteria. The share price may dip in the short term because of this selling activity, even if the spinoff’s long-term prospects are positive.

Related terms:

Accounting

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more

Divestiture

A divestiture is the disposal of a business unit through sale, exchange, closure, or bankruptcy. read more

Reverse Morris Trust (RMT)

A reverse Morris trust (RMT) allows a company to spin off and sell assets while avoiding taxes. read more

Reverse Stock Split

A reverse stock split consolidates the number of existing shares of corporate stock into fewer, proportionally more valuable, shares. read more

SEC Form 10-12B

SEC Form 10-12B is a Securities and Exchange Commission (SEC) form a public company must file when it issues a new stock through a spinoff. read more

Spinout

A spin out is a type of corporate realignment involving the separation of a division to form a new independent corporation. read more

Stock Dividend

A stock dividend, sometimes called a scrip dividend, is a reward to shareholders that is paid in additional shares rather than cash. read more

Subsidiary

A subsidiary is an independent company that is more than 50% owned by another firm. The owner is usually referred to as the parent company or holding company. read more

Tax-Free Spinoff

Tax-free spinoff refers to a corporate action in which a publicly traded company spins off one of its business units as an entirely new company. read more

Taxable Spinoff

A taxable spinoff is a divestiture of a subsidiary or division by a publicly traded company, which will be subject to capital gains taxation. read more