What is a Spin-Off?
A Spin-Off refers to when a parent company sells a specific business unit or division, i.e. a subsidiary, to effectively create a new standalone company.
As part of the spin-off, the parent company’s existing shareholders are given shares in the new independent company.
Spin-Off Corporate Action: M&A Process (Step-by-Step)
A spin-off refers to the formation of an independent entity, in which shares of the subsidiary are distributed among the shareholders of the parent company.
In a spin-off — a type of divestiture performed by corporations — the parent company separates a particular division in order to create an independent entity.
As a newly formed, independent entity, the business unit will have its own set of new shares (and ownership claims).
The existing shareholders receive shares in proportion to their original ownership percentage in the company, i.e. on a pro rata basis, and in the form of a non-cash special dividend.
Therefore, the number of shares received by an existing shareholder is directly a function of the number of shares the shareholder held in the parent company.
After completion of the spin-off, it is the decision of the shareholders on whether to continue to hold those new shares or to sell them in the open market.
Further, the business entity that was previously operating under the parent company now has its own management structure; it is now set up and recognized as an independent company.
Learn More → Spin-Offs (SEC)
Spin-Off: M&A Strategic Rationale
The rationale for spin-offs is most often in response to pressure from shareholders on the board of directors to divest a specific subsidiary or business segment.
The subsidiary, from their viewpoint, may be better off operating as a standalone company over the long run, i.e. unlocking hidden value currently hindered by being under a parent company.
In theory, spin-offs increase shareholder value by increasing the value of the parent by virtue of removing a business line that no longer fits with the core structure of the company.
The parent company itself might also be held back by the subsidiary due to a misalignment with its core operations — hence, activist investors that seek to identify and take a more hands-on approach to force management’s hand is another common catalyst for spin-offs.
Moreover, a company often performs a spin-off when its financial performance is underwhelming, so the sale could even be a necessary action to generate cash, i.e. a form of operational restructuring.
The spun-off companies are typically expected to be worth more as independent entities than as parts of a larger business, i.e. the sum of the parts is greater than the whole.
At the end of the day, the spin-off must be expected to create shareholder value in order to be approved.