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Spin-Off

A parent company creates a new business, keeps ownership

What is a Spin-off?

A corporate spin-off is an operational strategy used by a company to create a new business subsidiary from its parent company.  A spin-off occurs when a parent corporation separates part of its business into a second publicly-traded entity and distributes shares of the new entity to its current shareholders. The new entity takes assets, employees, or existing product lines and technologies from the parent in exchange for a pre-determined amount of cash. The spin entity may take on debt to provide a distribution to the parent in exchange for those assets or loss of cash flow.

 

Spin-Off transaction

 

Reasons to do a Spin-off

A spin-off may be a method for the parent to reduce agency costs and create tax shields or to enter a new industry while retaining a close relationship with the spun-off company. It is a way of reorganizing a company’s administrative structure in order to improve its profitability. When a company plans to consolidate or streamline its workflow, it can spin off a less productive division to form a new independent company. In other words, a company creates a new business entity out of its existing divisions, subsidiaries, or the sub-units.

The new individual company is expected to be more profitable and worth more alone than it would be as a part of the larger business entity.

When a spin-off occurs, the shareholders of the parent corporation are not required to surrender any of their parent corporation stock in exchange for the subsidiary’s stock.

 

What is a Split-off?

A corporate split-off is the process whereby a parent corporation organizes a subsidiary corporation to which it transfers part of its assets in exchange for all of the subsidiary’s capital stock, which is subsequently transferred to the shareholders of the parent corporation in exchange for a portion of their parent stock.

In other words, it is a transfer of corporate assets to a subsidiary involving the surrender of a part of the stock owned by the corporation’s shareholders in exchange for controlling stock of the subsidiary.

A split-off is a way of restructuring the capital structure of a company.  Shareholders of a split-off must relinquish their shares of stock in the parent company in order to receive shares of the subsidiary company. The split-off is also a tax-efficient way for the parent company to redeem their shares of stock.

 

Spin-off vs Split-off

A split-off differs from a spin-off in that the shareholders in a split-off must relinquish their shares of stock in the parent corporation in order to receive shares of the subsidiary corporation whereas the shareholders in a spin-off need not do so.

 

Additional resources

Thank you for reading the CFI guide to spin-offs and ways of creating value through corporate restructurings.  To keep learning and advancing your career as a financial analyst, these additional resources will help you on your way:

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