Spinoff

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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.

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BREAKING DOWN '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.

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RELATED FAQS
  1. What happens to the company stock if a subsidiary gets spun off?

    When a subsidiary gets spun off, the company's stock tends to drop. However, the investor in the stock does not lose any ... Read Full Answer >>
  2. What are some common cash-debt strategies that occur during a spinoff?

    Cash-debt strategies that are commonly used to in a spinoff to enable the parent company to monetize the spinoff are debt/equity ... Read Full Answer >>
  3. How can a divestiture help a company?

    In finance, the divestiture, or divestment, represents a reduction of an asset or its sale to another company mainly for ... Read Full Answer >>
  4. What proportion of the chemical sector is related to life sciences?

    The subsectors of the chemicals sector that are related to life sciences, pharmaceuticals and agricultural chemicals, make ... Read Full Answer >>
  5. What are some of the more common reasons divestiture occurs?

    In finance, divestment or divestiture is defined as disposing of an asset through sale, exchange or closure. A divestiture ... Read Full Answer >>
  6. How do spinoffs differ from initial public offerings (IPOs)?

    A spinoff is when a public parent company organizes a subsidiary and distributes shares to current stockholders for the new ... Read Full Answer >>
  7. Do joint ventures need an exit strategy?

    When two or more businesses come together for the purpose of achieving a specific goal, they form a joint venture. This type ... Read Full Answer >>
  8. How do spinoffs impact investors in the both the parent and subsidiary companies?

    A spinoff is when a company takes a portion of its operations and breaks it off into a separate entity. In a spinoff, shares ... Read Full Answer >>
  9. How is taxation treated for both the parent and subsidiary company during a spinoff?

    A common separation strategy used by corporations includes divestiture activities that segment a portion of a company's operations, ... Read Full Answer >>
  10. How do the bull and bear markets affect the value of a spinoff company's stock?

    A spinoff is a type of divestiture in which a company cedes its ownership interest in a business unit by distributing 10 ... Read Full Answer >>
  11. Why is the 1982 AT&T breakup considered one of the most successful spinoffs in history?

    AT&T had a history reaching back to 1885 and, as a government-supported monopoly, was a highly profitable company. Colloquially ... Read Full Answer >>

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