Company Spin Off: Meaning, Pros & Cons, Process, Example
What is a company spin off?
A company spin off is when an organization splits off part of its existing business. In doing so, that business unit becomes an independent company. The parent company distributes shares in the spin off company to existing shareholders on a pro rata basis to compensate for the loss of equity in the original parent company stocks.
Spin off vs carve out
A corporate spin off is similar to a carve out but not the same. The main difference between the two is that in a spin off, the parent company distributes shares in the spin off company to existing shareholders, whereas in a carve out, the subsidiary’s stock becomes available to the public on the stock market.
Spin off vs divestiture
A spin off can be thought of as a type of company divestiture in the sense that the parent company is divesting itself of the subsidiary by separating it out so it can become its own entity. However, remember that the shares in the subsidiary company remain with the shareholders of the parent.
Why spin off a company
There are plenty of reasons why an organization may want to spin off a company.
Spin off advantages and disadvantages
Advantages
- Allows the parent company to divest itself of a business even in the face of no buyers or decent offers.
- The so-called “conglomerate discount” – stockmarkets value a diversified large company at less than the sum of its individual business parts.
- Separation allows businesses moving in different directions, or with a different core focus, to do so more freely.
- If well-executed, a company spin off should create value for both the newly-created entity and the original parent company—delivering long term returns for stakeholders.
Disadvantages
- Such a significant separation can cause volatility in the share price.
- Some shareholders of the original company may not want shares in the spin off company, so it’s not uncommon to see high selling activity.
- Short term cost of legal separation and set up of a new entity.
- Employee resistance to change.
See also: Benefits of divestiture
Successful spin off companies: 3 examples
News Corp
News Corp is a spin off from 21st Century Fox, becoming fully independent in 2013. According to August 2022 figures, this successful spin off has an annual revenue of USD $10.39 billion.
HPE (Hewlett Packard Enterprises)
HPE split from Hewlett Packard in 2015 to allow the parent company to continue with personal computers and printers as the primary focus while the new entity focused on IT, cloud, and software. This spin off company reported an annual revenue of USD $27.979 billion in 2022.
CyberSource
CyberSource was a spin off from software.net (which later became beyond.com). The parent company developed a fraud detection system in response to being afflicted with recurrent instances of credit card fraud. The system was productized and spun off in 1995 and eventually acquired by Visa for ~$2B.
See also: Corporate spin-off examples
Company spin off process
Spinning off a company involves progressing through a seven-step process beginning with identifying the right management team to see the process through.
Learn more: How to spin off a company
Spin off due diligence
In preparation for a company spin off, the organization must go through the due diligence process. This is a thorough collation and analysis of the company’s financial, tax, legal, commercial, IT, operational, environmental and human resource details.
Learn more: Due Diligence