A spinoff is a new and separate company created when a parent company distributes shares in a subsidiary or business division to the parent company’s shareholders. The parent company expects that the new entity will be worth more on its own than it was as part of the parent company. A spinoff is also known as a spinout or starburst.
Key Takeaways
- A spinoff is an independent company formed when a parent company issues shares in an existing business or division to its shareholders.
- A parent company may establish a spinoff when it anticipates that a new, independent entity will be worth more than when part of the company.
- Spinoffs typically have their own management structure and a new name but may continue to receive financial and technological support from the parent company.
- Spinoffs can be promising investments for shareholders.
Delving into Spinoffs
A parent company will typically spin off part of its business if it sees it as a lucrative opportunity. Despite having a new name and separate management structure, the spinoff retains the same assets, intellectual property, and employees. The parent company usually continues to offer some degree of financial and technological support.
How Spinoffs Are Created
A corporation can create a spinoff by distributing 100% of its ownership interest in that business unit as shares of stock to existing shareholders. It might also offer its existing shareholders a discount to exchange their shares in the parent company for shares of the spinoff. For instance, an investor could exchange $100 of the parent’s stock for $110 of the spinoff’s stock. Spinoffs often lead to higher returns for shareholders due to the newly independent companies concentrating more effectively on their specific products or services.
The Rationale Behind Spinoffs
Spinoffs can happen for numerous reasons. The overriding belief is that an independent entity will be more profitable than it was as a part of the parent company. Additionally, the parent company may be in a better position to create more value.
- Companies may conduct spinoffs to concentrate resources and better manage areas of business with greater long-term potential.
- Firms aiming to streamline their operations often spin off unproductive or unrelated subsidiaries.
- If a portion of the business heads in a different direction with distinct strategic priorities from the parent company, it may be spun off to provide value independently.
- Companies that are unable to find buyers for a business unit may opt for spinning it off to offer more value to shareholders.
Both the parent company and the spinoff generally perform better post-spinoff since each can focus more closely on its core competencies.
Risks of Spinoffs
The downside to spinoffs is that their share prices can be highly volatile, often underperforming in weak markets and outperforming in strong markets. Spinoffs may witness high selling activity initially, leading to short-term share price dips despite positive long-term prospects.
Real-World Examples of Spinoffs
Spinoffs occur frequently, with dozens created annually in the United States. Examples include the separation of Smith & Wesson Inc. from American Outdoor Brands Corp. and PayPal’s separation from eBay Inc. Recently, General Electric spun off its healthcare division, GE HealthCare Technologies, and Jefferies Financial Group spun off its holdings of Vitesse in early 2023.
What Happens in a Spinoff?
In a spinoff, a parent company distributes shares of a division or subsidiary to its shareholders, creating a completely separate business entity.
Impact on Parent Company Shares
A spinoff often causes an initial drop in the parent company’s stock price as assets now owned by the spinoff are excluded from the parent company’s financials, lowering its book value. Total share value, however, tends to align with the parent company’s pre-spinoff stock price.
Are Spinoffs Beneficial for Investors?
Generally, spinoffs can be advantageous for investors. Both parent and new company shares typically outperform the market in the first few years post-spinoff, after initial volatility. The newly independent entity often possesses significant growth potential, attracting investors and driving share prices up. However, spinoff shares can also be volatile due to the newness and absence of a financial performance history.
The Bottom Line
A spinoff, also known as a spinout or starburst, creates a new company from an existing one. It’s undertaken with the expectation that the new company will be more valuable independently, and that the parent company can derive additional value without it. Bear in mind that spinoff share prices can be volatile as the market adjusts to the new company.
Related Terms: Divestiture, Spinout, Shareholder, Volatility, Assets.
References
- Stock Spinoffs. “Recent Spinoffs”.
- American Outdoor Brands, via U.S. Securities and Exchange Commission. “American Outdoor Brands Corporation Announces Intention to Separate into Two Independent Publicly Traded Companies”.
- eBay. “eBay Inc. Board Approves Completion of eBay and PayPal Separation”.
- General Electric. “GE Completes Separation of GE HeathCare”.
- BusinessWire. “Jefferies Completes Spin-Off of Vitesse”.
