Compiled by Harsh Gada
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.
Source: wallstreetmojo
What are the reasons for a spinoff?
The reasons why a company opts for a spinoff are:
– Increasing shareholder value by removing a section that is not suited to its structure.
– Assisting its divisions with improved core skills to grow as a separate entity.
– Selling a less profitable segment due to a lack of a buyer or private investors.
– Adding value by allowing a wide range of business concepts to flourish.
– Concentrating on a limited number of items, services, and resources.
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.
Example:
Assume a company, Mykaa Ltd, has multiple lines of businesses like manufacturing:
- Lipstick
- Sportswear
- Handbags
- Shoes
One day the company realises that its sportswear segment is doing extremely well but since the company’s primary segment is cosmetics, it is not able to focus on the sportswear segment.
This is when Mykaa Ltd decided to spin off the sportswear company on its own with an independent management team, CEO, resources etc.
The shareholders of Mykaa Ltd become shareholders of the Sportswear company. The newly formed Sportswear company becomes a publicly traded company with its own business units and products.
Most Famous Spinoffs in the World
- In 1999, Hewlett-Packard Co spun off Agilent technologies Inc
- In 2006, Viacom created spinoff company Viacom Inc
- In 2011, Expedia created spinoff company TripAdvisor
- In 2012, Kraft Foods Inc created spinoff company Kraft Foods Group Inc
- In 2017, eBay created spinoff company PayPal
Impact on Investors
The share price of the parent company can rise when spinoff plans are announced if investors believe such a move is financially beneficial. Of course, they could also decide a spinoff isn’t wise and sell shares in response to the news. Depending on their point of view, such a time could offer existing shareholders the opportunity to buy or sell parent company shares.
Spinoff investors may see share price volatility due to the company’s newness and lack of financial results. As a result, spinoff stock can underperform when markets are weak and outperform when markets are strong.
Do Spinoffs Create Value?
Yes, but not necessarily in their early years. As with any company, value is created as revenue is generated, profits are captured, and business success is achieved. It helps when a spinoff’s management has a financial stake in the company through stock options or substantial equity positions. As a result, investors could see their spinoff stock rise in value.
Conclusion
Many times, the parent company and the spun-off company seek to benefit from this restructuring. Spin-off companies perform better as separate entities than earlier when it was a part of the older larger business. Spinning off the non-profit entity enables the larger company to work on profit-making products. Thus, a spinoff may prove to be beneficial and lead to growth for both companies.
