Spinoff

Updated on April 8, 2024
Article bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

Spinoff Meaning

A spinoff, also known as starburst or spinout, refers to an operational strategy where a company separates its subsidiary to form a new independent entity. In doing so, the parent firm retains the ownership of the new business and distributes or sells shares of the new company to its existing shareholders.

Companies typically use this method when their divisions or sub-units are capable of operating independently and making profits. A subsidiary obtains a new name and leadership as soon as it separates from its holding firm. The parent organization contributes human, financial, and technological resources, existing products, infrastructure, and intellectual property to assist the new entity in maintaining production.

Key Takeaways

  • A spinoff refers to a strategy in which a firm divides its subsidiary into a separate, independent entity. It is one of three forms of divestitures, the other two being selloffs and split-ups.
  • The board of directors and shareholders approve a spinoff according to state laws and stock market norms.
  • The parent company owns the new business, while the spun-off corporation gets a new name and management and access to the former’s products, assets, resources, infrastructure, and intellectual property.
  • The holding company distributes a 100% ownership interest in the new company as a stock dividend to its existing shareholders on a pro-rata basis.

How Does Spinoff In Business Work?

A spinoff emerges when a corporation decides to dissolve a subsidiarySubsidiaryA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more or division into a separate entity. It is one of the three types of divestitures, with the other two being selloffs and split-ups.

The premise behind this is the organization’s belief that, if separated, the new firm will provide more value to all parties involved. It can also happen if the company believes the sub-unit is becoming a burden since it generates no significant revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more. Organizations also spin out to explore an innovative business idea, necessitating a sophisticated framework and a new strategy. In either case, the business practices divesting a subsidiary to allow it to thrive.

what is Spinoff

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The board of the company and shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more approve a spinoff. However, state legislation and stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more guidelines determine whether a firm needs to seek shareholder permission for a spinout. Once created, the firm sells a proportional share of its 100% ownership interest in the new company as a stock dividendStock DividendA stock dividend refers to bonus shares paid to shareholders instead of cash. Companies resort to such dividends when there is a cash crunch. Shareholders are allotted a certain percentage of shareholding.read more to its existing shareholders. Spinoffs seek to boost shareholder returns by focusing on unique products or services.

The spun entity works under new management and name. It further gains access to the assets and resources of the holding company in exchange for a fixed sum of money. In addition, the new company may seek for a business loan to repay the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies.read more. The holding company always makes sure the spinout does well in the market and never stops supporting the new venture financially and technologically. Besides becoming a significant spinoff investing source, it becomes a regular customer of the latter.

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Spinoff Impact

The spinoff business can be beneficial to investors considering the investment returns it provides to shareholders. While it has the freedom to pursue new ideas, the impact on share prices is quite adverse in the initial phases. Investors who can withstand market fluctuations are more likely to earn long-term returns.

Spinoff Benefits

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Similarly, the parent company can sell shares in the name of the separated entity and buy back the spinoff stock once the latter expands, reaping huge profits. Furthermore, it allows the holding company to concentrate on its core activities, decrease investment riskInvestment RiskInvestment risk is the probability or uncertainty of losses rather than expected profit from investment due to a fall in the fair price of securities such as bonds, stocks, real estate. In addition, each type of investment is prone to some degree of investment or default risk.read more, cut operating costs, and boost performance.

Why Do Companies Think Of Spinoffs?

A corporation recognizes the value of an entity to function independently, although other factors lead to a spinoff, such as:

Spinoff Examples

Let us look at spinoff examples below to understand the concept even better:

Example #1

Until mid-2020, a well-known international corporation only dealt with health supplements. However, when the number of COVID-19 cases increased worldwide, it began producing sanitizers and face masks to prevent the disease from spreading. People did not buy these products because the company was into manufacturing and selling health supplements.

As a result, the firm removed the division from its label and renamed it NO-COV. The company began earning massive profits as soon as consumers started using products from NO-COV without realizing it was nothing more than its subsidiary. In reality, the spinoff’s revenues for a year were comparable to those of its holding company for the previous three years.

Example #2

Waymo, Alphabet Inc.’s self-driving subsidiary, has started giving rides in San Francisco, California. In fact, in the next three years, it plans to have robotaxis for everyone. With this, the company is eager to hear from the public to determine what is acceptable and what is not. It will help both the parent company and the spinoff in evaluating the latter’s success.

Example #3

IBM announced its intention to spin off its information technology segment into a separate public company in October 2020. Following the announcement, IBM’s stock skyrocketed by about 6%.

The corporation agreed to dissolve the Managed Infrastructure Services division of its Global Technology Services business into NewCo. IBM will generate more money from cloud software and solutions sales due to the separation, which may happen by the end of 2021. It might also assist both organizations in exploring new prospects and creating value for shareholders and clients.

Frequently Asked Questions (FAQs)

What does spinoff mean?

A spinoff occurs when a company separates its subsidiary or division to form a new entity under a new name and management. The newly formed entity receives access to the holding company’s assets, resources, and technologies in exchange for a defined sum of money.

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 does a spinoff benefit the parent company?

Spinout enables the parent company to focus on its primary business, reduce investment risk and operating expenses, and improve performance. In addition, the holding company can sell shares in the name of the spun-off corporation and then buy back spinoff stock, resulting in tremendous profits.

This has been a guide to what is Spinoff and its meaning. Here we discuss how spinoff in business works along with its impact and examples. You can learn more from the following articles –

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