Spinoff

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.

• 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.

A spinoff emerges when a corporation decides to dissolve a subsidiary 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 revenue. 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.

The board of the company and shareholders approve a spinoff. However, state legislation and stock exchange 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 dividend 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 company. 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.

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.

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 risk, cut operating costs, and boost performance.

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

• Increasing the value of shareholders by detaching a segment unfit for its structure,
• Helping its divisions with better core competencies and long-term potential to grow as a separate entity,
• Pursuing a unique revenue-generating concept than what it currently follows,
• Selling a less productive segment on failing to find a buyer or private equity,
• Avoiding the conflict with shareholders over entering different sectors,
• Reducing overhead costs and taxation,
• Creating value by allowing diverse business ideas to proceed freely,
• Focusing on specific products, services, and resources,
• Streamlining business operations, and
• Improving the profitability of the division by managing its administrative structure

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.

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 -

• Carve-Out
• Merger
• Spin off vs Split Off