What is Spinoff? - Spin off MeaningA spinoff is a type of corporate action. In a spinoff, a particular section of the parent company is separated from the main business. The spun off company gets its own unique identity different from the parent company. The spinoff company has its distinct business and gets its own management, assets, employees and other resources. It is responsible for its own profits and losses. In a spinoff, the existing shareholders of the parent company receive shares of the spin off company as special dividends. A spinoff is also known as a spin out or starburst.
Understanding Spinoffs with an exampleAssume a company, Mykaa Ltd, has multiple lines of businesses like manufacturing:
Why Do Spinoffs happen? - Reasons for Spinoffs in IndiaSpin offs can be both positive and negative.
Positive reasons for Spinoff1. Valuable Spun off company: The parent company might feel that the spinoff company is much more valuable on its own and can create lucrative cash flows if provided independence and separate resources. 2. Increasing Value of the Parent Company: If one segment of the company is underperforming, then spinning it off can increase the value and potential of the parent company by getting rid of a weak section of the business. Through a spinoff the parent company gets streamlined which is beneficial for the company as well as the shareholders.
Negative Reasons for Spinoff1. Not in line with long term vision: The parent company may feel that the spinoff company no longer fits with the company’s future vision and will be a drain on its resources. 2. Strategy to offload Debt: Oftentimes, spinoffs are a way for a parent company to offload its debts, to make their own balance sheet look pretty. 3. Absence of buyers: Parent companies might be looking to sell the spinoff company but in the absence of buyers, they end up selling the spinoff company to the shareholders, who have no option but to accept. 4. Avoid Capital Gains Tax: Parent companies opt for a spinoff instead of selling the company to avoid capital gains tax on the sale.
What happens to existing shareholders in a Spinoff? Spinoffs and Shareholders - The PositivesIn a spinoff, the shareholders of the parent company are allotted shares of the spinoff company as special dividends. Shareholders of profitable spinoff companies can rejoice as the spinoff company gets its independent management, resources and employees and can focus on its independent business objective without the burden of the parent company. Also, often the spinoff company is the most lucrative business of the parent company. With segregation of operations, the spinoff company can create its own brand and discover its true market value.
Spinoffs and Shareholders - The NegativesShareholders have little say in spinoffs and are awarded shares of the spinoff company as a special dividend. This means that the shareholders end up having ownership of companies that they have little knowledge or interest in. Spinoff companies have low market capitalisation and are extremely volatile. Spinoff companies face issues in getting listed due to stringent regulatory norms. Shareholders of the spinoff company may be unhappy with the spinoff and may aggressively sell their shares, creating higher volatility in the short term, even if the long-term prospects of the spinoff company is lucrative.
What are the different types of Spinoff - Types of Corporate Spin off1. No Ownership Spinoff: In this type of spinoff the parent company maintains zero ownership in the spun off company. All shares are distributed among existing shareholders. 2. Partial Ownership Spinoff: In this type of spinoff, the parent company can retain upto 20% of ownership in the spinoff company. This is done so that the parent company can have some say in the functioning of the spun off company.
Most Famous Spinoffs in the World
- In 1999, Hewlett-Packard Co spun off Agilent technologies Inc
- In 2006, Viacom created spinoff company Viacom Inc
- In 2011, Expedia created spinoff company TripAdvisor
- In 2012, Kraft Foods Inc created spinoff company Kraft Foods Group Inc
- In 2017, eBay created spinoff company PayPal
Recent Spinoff companies in India in 2020
|Suven Pharmaceuticals Ltd
|22nd January 2020
|14th February 2020
|5th March 2020
|9th March 2020
|27th March 2020
|15th June 2020
|24th August 2020
|22nd September 2020
|25th September 2020
|7th October 2020
|11th November 2020
|11th December 2020