Loading the player...

What is a 'Spinoff'

A spinoff is 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. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.

A spin off is also known as a spinout or starbust.

BREAKING DOWN 'Spinoff'

When a corporation spins off a business unit that has its own management structure, it sets it up as an independent company under a renamed business entity. The company that initiates the spinoff is referred to as the parent company. A spinoff retains its assets, employees, and intellectual property from the parent company which gives it support in a number of ways, such as investing equity in the newly formed firm, and providing legal, technology, or financial services.

There are a number of reasons why a spinoff may occur. A spinoff may be conducted by a company so it can focus its resources and better manage the division that has better long-term potential. 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. On the other hand, if a portion of the business is headed in a different direction and has different strategic priorities from the parent company, it may be spun off so it can unlock value as an independent operation. A company may also separate a business unit into its own entity if it has been looking for a buyer to acquire it for a while but was unsuccessful. For example, the offers to purchase the unit may be unattractive and the parent company might realize that it can provide more value to its shareholders by spinning off the business sector.

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 company 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.

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; Sears Holding Corporation’s spinoff of Sears Canada in 2012; eBay's spinoff of PayPal; to name just a few examples.

RELATED TERMS
  1. Taxable Spinoff

    A taxable spinoff is a divestiture of a subsidiary or division ...
  2. SEC Form 10-12B

    SEC Form 10-12B is a filing required by the Securities and Exchange ...
  3. Parent Company

    A parent company is a company that has a controlling interest in ...
  4. Fairness Opinion

    A fairness opinion is a report that is provided to the selling ...
  5. Split-Off

    A split-off provides shareholders of a parent company the opportunity ...
  6. Charlie Ergen

    The founder, chairman and CEO of DISH Network, a spinoff of former ...
Related Articles
  1. Investing

    Parents And Spinoffs: When To Buy And When To Sell

    Spinoffs can create great investing opportunities, but there's a time to stick around and a time to jump ship.
  2. Investing

    How Stock Investors Can Profit Big From Spinoffs

    Spinning Rich Profits: Spinoffs as a group have posted total returns of nearly 300% over 10 years
  3. Insights

    Honeywell's $1.3B Spinoff of AdvanSix (HON)

    Will investors benefit from Honeywell's spinoff of its resins and chemicals business as an independent public company?
  4. Investing

    Unilever Shares Up, Big Holders Back Food Spinoff

    Allianz, Unilever’s 14th-biggest shareholder, is one investor open to a food-segment spinoff.
  5. Trading

    Jury Still Out on Yum Brands Split-Up

    Yum Brands and Yum China Holdings show little technical progress since their Nov. 1 split, drawing into the question the wisdom of the break-up.
  6. Investing

    The Financial Future of PPL Corp's Spinoff, Talen Energy (TLN)

    Explore the financial prospects for Talen Energy, the resulting company from PPL Corporation's spinoff, including the impact on earnings, cash flow and growth.
  7. Investing

    Yamana Gold to Spin Off Brio Gold Subsidiary (AUY)

    In an effort to create shareholder value, Yamana announced plans to spin off its Brio Gold subsidiary into a standalone publicly-traded company.
  8. Investing

    HPE’s Upcoming Earnings: What to Expect (HPE)

    Analysts see upside in the completion of the IT and Infrastructure-as-a-service provider's non-core business spin-offs, buy on modest growth outlook.
  9. Investing

    What Windstream's Done Deal Means for Investors (CSAL, WIN)

    For years, rural telecom company Windstream Holdings (NASDAQ: WIN) provided healthy and reliable dividend payments to shareholders, with yields that were consistently among the best in the stock ...
RELATED FAQS
  1. How do spinoffs impact investors in the both the parent and subsidiary companies?

    Learn about how spinoffs affect investors in both the parent company and the subsidiary and what strategies investors use ... Read Answer >>
  2. What are the tax implications for both the company and investors in a divestiture ...

    Learn the tax implications for a company and its investors in divestiture events, such as spinoffs, equity carve-outs, and ... Read Answer >>
  3. How does the law of supply and demand affect the stock market?

    Find out how the law of supply and demand affects the stock market, and how it determines the prices of individual stocks ... Read Answer >>
  4. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center