What Is a Spinoff?
A spinoff is a new and separate company that's created when a parent company distributes shares in a subsidiary or business division to the parent company shareholders. It is a type of divestiture.
A parent company creates a spinoff expecting that it will be worth more as an independent entity than it was as part of the parent company. A spinoff is also known as a spinout or starburst.
Key Takeaways
- A spinoff is an independent company created when a parent company issues shares in an existing business or division to parent company shareholders.
- A parent company may form a spinoff when it projects that a new, independent entity will be worth more than it was as part of the company.
- A spinoff will have its own management structure and a new name, but it may continue to receive financial and technological support from the parent company.
- Spinoffs tend to be good investments for shareholders.
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Understanding Spinoffs
A parent company will spin off part of its business if it expects that it will be lucrative to do so. The spinoff will have a separate management structure and a new name, but it will retain the same assets, intellectual property, and human resources. The parent company will continue to provide financial and technological support, in most cases.
How Spinoffs Are Created
A corporation creates a spinoff by distributing 100% of its ownership interest in that 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 spinoff.
For example, an investor could exchange $100 of the parent’s stock for $110 of the spinoff’s stock. Spinoffs tend to increase returns for shareholders because the newly independent companies can better focus on their specific products or services.
Why Spinoffs Happen
A spinoff may occur for various reasons. But the overall belief is that it will be more profitable as an independent entity than it was as a part of the parent company. And, the parent company may then be better positioned to achieve greater value, as well.
- A company may conduct a spinoff so that it can focus its resources and better manage the areas of the business that have greater long-term potential.
- Businesses wishing to streamline their operations often spinoff less productive or unrelated subsidiary businesses. For example, a company might spin off one of its mature business units that is experiencing little or no growth so that it can focus on a product or service with higher growth prospects.
- Alternatively, if a portion of the business is headed in a different direction and has strategic priorities different from the parent company, it may be spun off to provide value as an independent operation.
- A company that hoped sell a business unit but is unable to interest buyers in it may spin it off instead. Doing so may provide more value to shareholders.
Both the parent company and the spinoff tend to perform better as a result of the spinoff transaction, with each now able to focus more effectively on its core competencies.
Risks of Spinoffs
The downside of spinoffs is that their share price can be more volatile and can tend to underperform in weak markets and outperform in strong markets.
Spinoffs can also experience high selling activity initially. Parent company shareholders may not want the shares of the spinoff they received because the spinoff may not fit their investment criteria. The share price may dip in the short term because of this selling activity, even if the spinoff’s long-term prospects are positive.
Examples of Spinoffs
Spinoffs are a common occurrence. Typically, dozens are created each year in the United States. Examples include the spinoff of Smith & Wesson Inc. from American Outdoor Brands Corp. and the separation of PayPal Inc. from its parent company, eBay Inc.
In addition, in early 2023, General Electric spun off its healthcare division, GE HealthCare Technologies and Jefferies Financial Group spun off its holdings of Vitesse.
What Happens in a Spinoff?
A parent company distributes shares in a division or subsidiary to parent company shareholders and creates a wholly separate business entity.
What Effect Does a Spinoff Have on Parent Company Shares?
Initially, a spinoff will cause the price of the parent company stock to drop as the assets now owned by the spinoff are removed from the parent company's financials, lowering the company book value. Parent company shareholders should see that together, both share prices should approximate the parent company's pre-spinoff stock price.
Are Spinoffs Good for Investors?
They can be. Generally, both company shares and spinoff shares tend to outperform the market in the first couple of years following a spinoff (after some initial dips and volatility). In addition, as a small company, the spinoff has great potential for growth along with a focused, enthusiastic management. This can attract investors, which can boost share price. However, spinoff shares can be volatile due to the company being new and lacking financial performance history.
The Bottom Line
A spinoff, also known as a spinout or starburst, creates a new company out of an existing company. It's a type of divestiture, and is only done if a parent company expects that the new company will be worth more on its own and the parent company can offer added value without it. Bear in mind that the share price of a spinoff can be volatile as the market adjusts to the new company.
