A spinoff is when a public parent company organizes a subsidiary and distributes shares to current stockholders for the new business, thereby creating a new publicly traded company. An initial public offering (IPO) occurs when a private company first sells stock to the public to raise capital. A spinoff is the creation of a new public company out of a current public company, while an IPO is a private company going public for the first time. In a spinoff, shares are usually distributed on a pro rata basis. Many spinoffs occur at the demand of activist hedge funds, which have risen in prominence since 2001.
Spinoffs are a type of corporate restructuring. The parent company issues its equity interest in the spinoff to its current shareholders. This is a tax-free distribution to shareholders of the spinoff’s stock as a dividend. Shares in the new company are not taxed as capital gains to investors which is a significant advantage. Further, activist hedge funds like spinoffs because they create individual companies that are more focused on business objectives and have a distinct identity. Large conglomerates with disparate businesses under management are slow to respond to market changes. Spinoffs allow companies to seek out more opportunity for growth. Further, spinoffs have also tended to perform well in the markets, making them even more attractive.
IPOs allow private companies to gain access to significant capital available in the public market and gain liquidity by being listed on an exchange. However, public companies must disclose financial information and comply with the significant requirements from the U.S. Securities and Exchange Commission (SEC). Private companies work with investment banks to provide financial backing and guide them through the IPO process.