What is a Spin Out?

A spinout is also known as a spin-off or starburst. It is a process whereby a new business entity emerges from an existing business. When an existing business, often a parent company slits up its parts, divisions, subsidiaries or units, to create a new and independent company, a spinout has occurred. When a spinout transaction is executed, new companies formed have their own assets, facilities, employees and run their operations independent of the parent company. In the United States, the initiator of a spinout which is the parent company is required to provide necessary information about the spinout to the Securities and Exchange Commission. Such information is detailed in Form 10-12B of the SEC.

How does a Spin Out Work? 

A spinout is a corporate action in which a new company emerges from an existing one and begins to operate independently. There are two major reasons companies carry out spinouts, one of the reasons is to unleash the potentials of a division or subsidiary that has been recording overall growth than the entire company. Another reason for spinout is to enable the parent company to pay more attention to its core businesses, especially if the division spun out is causing lots of distraction. When reporting a spinout, a parent company must state the reasons for the action and the expectation of the new company. Spinout transactions are not easily wrapped up, sometimes, such transactions take up to six months or more than.

Some Drawbacks of a Spin Out

For investors, spinouts are attractive because they get higher returns since the sum of the separated divisions of a company are more than the sum of the entire company. There are however certain drawbacks of spinouts, the major drawbacks include the following;

• Spinouts require lots of time, considering that many of them take up to six months to be completed.
• Spinouts create a major shift in the management of the parent company because many members of the management focus on the spinout transaction rather than their core duties. In fact, after most spinouts are completed, some members of the management team of the parent company go to the newly created company.
• Spinouts are expensive to complete.