What Is a Corporate Spin-Off?

What Is a Spin-Off?

A parent company creates a spin-off division as an independent entity. A spin-off is initiated when the company expects the spin-off may be worth more independently than as part of the parent company. A spin-off is also known as a spinout or starburst. A spinoff is created when a parent company distributes shares in a subsidiary or business division to the parent company shareholders. It is a type of divestiture.

How a Spin-Off Is Created

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

A corporation creates a spin-off by distributing 100% of its ownership interest in the targeted business unit as shares of stock to existing shareholders. It can also offer its existing shareholders a discount to exchange their shares in the parent company for shares of the spin-off.

For example, an investor could exchange $100 of the parent’s stock for $110 of the spin-off’s stock. Spin-offs may increase shareholder returns because newly independent companies can better focus on their specific products or services.

Benefits

• A spin-off may enable the business unit to focus its resources and better manage areas with greater long-term potential.
• Businesses can streamline operations and spin off less productive or unrelated subsidiary businesses.
• When a portion of a business has different strategic priorities than the parent company, a spin-off may provide value independently to the company and its shareholders.

Risks

• A company's and the spin-off's share price can be more volatile and spin-offs may experience high selling activity initially.
• Parent company shareholders may not want the shares of the spin-off they received because the spin-off may not fit their investment criteria.
• The spin-off's share price may dip in the short term because of this selling activity, even if the spin-off’s long-term prospects are positive.
  

Examples

In 2022, according to data compiled by EY and Goldman Sachs, over thirty corporate separations, or spin-offs, occurred globally across multiple industries, representing 17% of all announced separations since 2012.

Historical examples of spin-offs include Smith & Wesson Inc. from American Outdoor Brands Corp. in 2019, and the separation of PayPal Inc. from its parent company, eBay Inc. in 2015.In early 2023, General Electric spun off its healthcare division, GE HealthCare Technologies, and Jefferies Financial Group spun off its holdings of Vitesse.

The Bottom Line

A spin-off, also known as a spinout or starburst creates a new company from an existing company. It's a type of divestiture and is only done if a parent company expects the new company will be worth more independently.