Corporate spin-off

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A corporate spin-off, also known as a spin-out or a starburst, refers to a type of corporate action where a company "splits off" sections as a separate business.[1]

Characteristics[edit]

Spin-offs are divisions of companies or organizations that then become independent businesses with assets, employees, intellectual property, technology, or existing products that are taken from the parent company. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest narrowly in the portion of the business they think will have the most growth.[2]

In contrast, divestment can also sever one business from another, but the assets are sold off rather than retained under a renamed corporate entity.

Many times the management team of the new company are from the same parent organization. Often, a spin-off offers the opportunity for a division to be backed by the company but not be affected by the parent company's image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment. Spin-offs also allow high-growth divisions, once separated from other low-growth divisions, to command higher valuation multiples.[3]

In most cases, the parent company or organization offers support doing one or more of the following:

  • Investing equity in the new firm,
  • Being the first customer of the spin-off that helps create cash flow
  • Providing incubation space (desk, chairs, phones, Internet access, etc.)
  • Providing legal, finance, or technology services

All the support from the parent company is provided with the explicit purpose of helping the spin-off grow.

U.S. Securities and Exchange Commission[edit]

The United States Securities and Exchange Commission's definition of "spin-off" is more precise. Spin-offs occur when the equity owners of the parent company receive equity stakes in the newly spun off company. For example, when Agilent Technologies was spun off from Hewlett-Packard in 1999, the stock holders of HP received Agilent stock.

A company not considered a spin-off in the SEC's definition (but considered by the SEC as a technology transfer or licensing of technology to the new company) may also be called a spin-off in common usage.

Other definitions[edit]

A second definition of a spin-out is a firm formed when an employee or group of employees leaves an existing entity to form an independent start-up firm. The prior employer can be a firm, a university, or another organization.[4] Spin-outs typically operate at arm's length from the previous organizations and have independent sources of financing, products, services, customers, and other assets. In some cases, the spin-out may license technology from the parent or supply the parent with products or services; conversely, they may become competitors. Such spin-outs are important sources of technological diffusion in high-tech industries.

Reasons for spin-offs[edit]

One of the main reasons for what The Economist has dubbed the 2011 "starburst revival" is that "companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity".[1] For example, Foster's Group, an Australian beverage company, was prepared to sell its wine business. but due to the lack of a decent offer, it decided to spin off the wine business, which is now called Treasury Wine Estates.[5]

Conglomerate discount[edit]

According to The Economist, another driving force of the proliferation of spin-offs is what it calls the “conglomerate discount” — that "stockmarkets value a diversified group at less than the sum of its parts".[1]

Examples[edit]

Some examples of spin-offs (according to the SEC definition):

Examples following the second definition of spin-out:

Academia[edit]

An example of companies created by technology transfer or licensing:

  • Since 1997, Oxford University's Isis Innovation has helped create more than 70 spin-out companies,[6] and now, on average, every two months a new company is spun out of "academic research generated within and owned by the University of Oxford". Over £266 million in external investment has been raised by Isis spin-out companies since 2000, and five are currently listed on the London Stock Exchange's Alternative Investment Market (AIM).[7]

Mirror companies[edit]

Mirror company formation is a specialized form of spin-off used to create a new public company. It simplifies the process of listing the shares on a public stock exchange.

It works by an existing public company issuing a bonus share at a 1-for-1 rate in the new company. This new company is then sold to another company that does not want to go through the complex and expensive process of issuing a prospectus. The company that purchases the "shell" then does a reverse takeover, to transfer an operating business into the new company. This is often called a "backdoor listing".

The advantages are the original company sells a shell for much more than it cost to create and the shareholders of the public company receive shares in a new operating business. For the operating company it is much faster and possibly also cheaper than the normal requirements of complying with the listing requirements of most exchanges.

The London Stock Exchange's Alternative Investment Market is considered[by whom?] the best market for new ventures as the market is large and has many international companies listed. Also, the time and effort required to achieve a listing is much shorter than many other markets. It typically costs at least $1 million to form a public company and list on a stock exchange.

In the United States, a mirror company may be formed tax-free by complying with the requirements of Internal Revenue Code section 355.[8]

See also[edit]

References[edit]

  1. ^ a b c "Starbursting". The Economist. March 24, 2011. Retrieved 18 April 2011. 
  2. ^ Zahra, Shaker A. "Governance, Ownership, and Corporate Entrepreneurship: The Moderating Impact of Industry Technological Opportunities". Academy of Management Journal 39 (6): 1713–1735. doi:10.2307/257076. 
  3. ^ Wisler, Philip; Kushin, Keith. "Spin-Off Transactions: A Disaggregation Strategy Promises Rewards". www.transactionadvisors.com. ISSN 2329-9134. Retrieved 08/06/2014.  Check date values in: |accessdate= (help)
  4. ^ Graham Richards (2009). Spin-Outs: Creating Businesses from University Intellectual Property. Harriman House. ISBN 978-1-905641-98-7
  5. ^ Nicholson, Chris V. (15 February 2011). "Foster’s to Separate Wine and Beer Businesses in May". New York Times. 
  6. ^ "About Isis Innovation", at University of Oxford
  7. ^ ""Spin-out Companies"". Isis Innovation. Retrieved 9 June 2014. 
  8. ^ "Calculating Tax Basis for Spinoff Investments". Spinoff & Reorg Profiles. Gemfinder. Retrieved 9 June 2014.