What is a Spin-off?

A spin-off is when a division or subsidiary of a company is separated from the parent corporation and starts to offer its own shares.

The term can also colloquially refer to a situation where a group of talent leaves the larger company to start their own firm doing similar work as they used to do. As far as the SEC is concerned, the definition of a spin-off must include the shareholders of the parent corporation being offered a substantially proportionate amount of shares in the new company.

A corporation might decide to do a spin-off for a number of reasons. One could be that the subsidiary or division is not as integrated with the rest of the corporation as they would like, from an efficiency standpoint or a branding standpoint, and they might decide that both entities would be more likely to thrive separately.

It has been said that the price of a corporate conglomerate’s shares is actually discounted from the sum of its parts, and if investors see value in that, the spun-off company would be able to raise a substantial amount of new capital in their initial offering, which is called an equity carve-out IPO.

In a carve-out the parent company is basically giving up their shares and offering them to the public. A split-off is one in which equity in the spun-off company is offered in exchange for shares of the parent company, at a discount, which is called an exchange offer.

In some situations a spin-off will be run by practically the same shareholders and management, but in others the spin-off will be revamped with a majority of new board members and management. Some are effectively a technology transfer from the parent to a new entity, and in some cases the parent might be a university or other academic institution.

There are different reasons for using any of the above strategies in different situations, tax considerations being not the least among them.