Definition of 'Spinoff'
The creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. A spinoff is a type of divestiture. Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs. For example, a company might spin off one of its mature business units that is experiencing little or no growth so it can focus on a product or service with higher growth prospects. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.
Investopedia explains 'Spinoff'
Spinoffs are a common occurrence; there are typically about 50 per year in the United States. You may be familiar with Expedia’s spinoff of TripAdvisor in 2011, United Online’s spinoff of FTD companies in 2013 or Sears Holding Corporation’s spinoff of Sears Canada in 2012, to name just a few examples.
A corporation creates a spinoff by distributing 100% of its ownership interest in that business unit as a stock dividend to existing shareholders. It can also offer its existing shareholders a discount to exchange their shares in the parent 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. Both the parent and the spinoff tend to perform better as a result of the spinoff transaction, with the spinoff being the greater performer.
The downside of spinoffs is that their share prices can be more volatile and can tend to underperform in weak markets and outperform in strong markets. They can also experience high selling activity; shareholders of the parent may not want the shares of the spinoff they received because it may not fit their investment criteria. Share price may dip in the short term because of this selling activity, even if the spinoff’s long-term prospects are positive.