Spin-Off

What Is a Spin-Off?

A spin-off is a transaction in which a company creates a new, separate company out of one of its business units and gives the new company's shares to its existing shareholders. The business being separated is usually a subsidiary or division that the parent has operated under its own umbrella. After the spin-off, the new company trades on its own, and the original company, called the parent, no longer owns it.

Shareholders typically receive the new shares in proportion to the shares they already hold. If you owned shares of the parent before the transaction, you generally end up owning shares of both companies afterward. The new shares are usually distributed as a dividend in kind, meaning the payment consists of shares rather than cash.

How It Works

In a typical spin-off, the parent first restructures so that the target business sits inside a separate legal entity. It then sets a record date, and shareholders on that date receive shares of the new company on a set distribution date. From that point, each company has its own management, its own board of directors, and its own financial reporting.

Shares of the two companies often begin trading separately within days or weeks of the distribution, and their prices can move in different directions. Because the combined value of the two companies may differ from the value of the parent before the split, the parent's share price is usually adjusted when it begins trading without the distributed shares.

Why Companies Pursue Spin-Offs

Management may pursue a spin-off to sharpen focus. A unit that is a small part of a large conglomerate may receive little attention from investors, and separating it can let each business be evaluated on its own results. Spin-offs can also allow a business with different risks, growth rates, or capital needs to pursue its own strategy and raise its own financing.

Considerations for Investors

Spin-offs can create tax considerations, which depend on how the transaction is structured and on individual circumstances. Investors often need to allocate their original cost basis between the parent's shares and the new company's shares. Because the new company may be unfamiliar, a shareholder may end up holding a business they did not choose, and some investors sell the new shares soon after receiving them. Spin-offs are one of several corporate restructurings, and the reasons behind each one vary.