What is a Spinoff?

A spinoff refers to a process of creating a new company from an existing one through the division or separation of a subsidiary from a parent company. A spinoff can also occur when a new product is created from an old one, either through the modification of the old product or the creation of a new product. 

A spinoff is otherwise called a spin-out or a starburst. When a new company is created from an old one, it runs independently rather than being a subsidiary of a parent company. When a company spins off a new and independent company, it means it splits off one of its sections as a separate business.

How does a Spinoff Work? 

It is important to know that if a parent company decides to initiate a spinoff, one of its sections of subsidiaries is split from the entire company to form an independent company. The spin-off; the newly created company has its own assets and distinct business operations that are no longer under the control of the parent company. 

Parent companies initiate spinoffs for a number of reasons which include sustainability and increasing business potential. Also, if a company is getting too large, it wants to undertake a spin-off so that its resources can be concentrated while the sections that are split become independent companies. A parent company that has redundant or unrelated subsidiaries can undertake a spinoff so that the redundant ones are cut off and the business becomes more concentrated. 

A spinoff can also occur to allow a subsidiary or section of a company to focus on other profitable businesses. Businesses or subsidiaries that are not growing well can also be split from the remaining business in order to position it for takeover or acquisition. The initiator of a spinoff is a parent company, for a spinoff to be successful, 100% of the stock ownership of the company is distributed as stock dividend to existing shareholders. This allows shareholders to enjoy increased returns while the spinoff and parent company enhance their performance.

Special Considerations

Despite that spinoff transactions are executed for good reasons, there are certain downsides of spinoffs. The spinoff is the new or independent company created out of an existing company. Spin-offs can either perform well or underperform depending on the markets they operate in, whether the markets are strong or weak. The share price of spinoffs is volatile according to the selling activities the spinoffs experience. Here are the key takeaways of a spinoff;

• A spinoff refers to a process in which an independent business entity is created from a parent company either through the division or separation of the parent company.
• The shares of an existing business can be sold or distributed to shareholders in order to create a spinoff.
• A spin-off company is no longer a part or a subsidiary of a parent company, rather, it has become an independent business entity.