Spinoff

A spinoff (spinout, starburst) is the selling of stocks of an existing company in order to create a new independent company. It is basically a type of asset sale, in which the company assumes that it costs more as an independent one.

Understanding Spinoffs

An existing company gives part of its business to a daughter company, if it is profitable. The daughter company will have its own name, its own hierarchy, and its own management. In addition, it will have the financial and technological support of the parent company, its assets, intellectual property and human resources.

The stock prices of subsidiaries can be more volatile. It does not pay off in weak markets, and is overvalued in strong markets. On the other hand, the shareholders of the parent company may not want to buy shares of spinoff companies, because they do not meet certain criteria. Spinoff companies usually have a positive long-term outlook, but because of low selling activity, the share price may fall in the short term.

The company allocates 100% of its interest in the unit by dividends in shares of the holders' stocks, and then creates a spinoff. Also, the company may offer holders a discount for exchanging shares of the parent company for shares of the spinoff company. Spinoff companies typically provide higher returns to shareholders, as the new independent companies can focus on their specific products or services. Thus, $100 of parent company stock can be exchanged for $110 of spinoff company stock.

Spinoffs are widespread. Tens of such companies often appear in the U.S. One recent spin-off was PayPal, which spun off from eBay in 2020.

Spinoff creation reasons

Companies do spinoffs for a variety of reasons. For example, a company wants to focus its resources on longer-term potential and better manage a department. Maybe, a company wants to put its activities in order and sell a less profitable or undeveloped line of business. Perhaps, the subsidiaries' lines of business are not interconnected and are to be sold as spinoffs. If the subsidiary develops in another direction and pursues other goals and purposes, the parent company may spin off it. In this way, the subsidiary becomes a separate business unit and this will allow it to increase in value.

Sometimes a company spins off a department into a separate company because it is more difficult to find a buyer for part of the parent company than to find a buyer for a separate company. In addition, the parent company can give more profit to its shareholders by spinning off the unit.