Corporate spin-off

A corporate spin-off, also known as a spin-out,[1] starburst or hive-off,[2] is a type of corporate action where a company "splits off" a section as a separate business or creates a second incarnation, even if the first is still active.[3] It is distinct from a sell-off, where a company sells a section to another company or firm in exchange for cash or securities.

Characteristics

Spin-offs are divisions of companies or organizations that then become independent businesses with assets, employees, intellectual property, technology, or existing products that are taken from the parent company. Shareholders of the parent company receive equivalent shares in the new company to compensate for the loss of equity in the original stocks. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest narrowly in the portion of the business they think will have the most growth.[4]

In contrast, divestment can also sever one business from another, but the assets are sold off rather than retained under a renamed corporate entity.

Many times, the management team of the new company is from the same parent organization. Often, a spin-off offers the opportunity for a division to be backed by the company but not be affected by the parent company's image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment. Spin-offs also allow high-growth divisions, once separated from other low-growth divisions, to command higher valuation multiples.[5]

Reasons for spin-offs

Companies pursue a spin-off when they believe the value of operating separately would exceed their current value as a single company. This strategy narrows the focus of both companies and allows for specialized management expertise, focused strategies tailored to different growth trajectories, and enhanced scrutiny from securities analysts, potentially increasing the value for shareholders.[12]

One of the main reasons for what The Economist has dubbed the 2011 "starburst revival" is that "companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity".[3] For example, Foster's Group, an Australian beverage company, was prepared to sell its wine business. However, due to the lack of a decent offer, it decided to spin off the wine business, which is now called Treasury Wine Estates.[13]

Examples

Some examples of spin-offs (according to the SEC definition):

Examples following the second definition of spin-out:

• Guidant was spun off from Eli Lilly and Company in 1994, formed from Lilly's Medical Devices and Diagnostics Division.
• Agilent Technologies spun off from Hewlett-Packard (HP) in 1999, formed from HP's former test-and-measurement equipment division. Later in 2014, Keysight was spun off from Agilent Technologies.
• Expedia Group was spun off from Microsoft in 1999, with its eponymous subsidiary Expedia.
• DreamWorks Animation was spun off from DreamWorks Pictures

See also

• Demerger
• Divestment
• Equity carve-out
• Stub (stock)
• Successor company

Further reading

• EIRMA (2003) "Innovation Through Spinning In and Out", Research Technology Management, Vol. 46, 63–64.
• Rohrbeck, R., Hölzle K. and H. G. Gemünden (2009): "Opening up for competitive advantage: How Deutsche Telekom creates an open innovation ecosystem", R&D Management, Vol. 39, S. 420–430.

External links

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