Spinoff is the process of splitting off selected assets or operating businesses or a division of a corporation as a new company. As a noun, the term refers to the new company. As a verb spinoff refers to the process of creating the new company.
Companies routinely review the businesses they own and especially look at aspects such as their growth rate, their prospects for the future, and their need for capital. "Non-strategic businesses" can be offered for sale to others, but when the business is large enough and offers are considered inadequate, creating a new company and spinning off the assets is a common approach.
How to value the stock of the new company is always a challenge. Experts arrive at an estimate based on assets, earnings, and the price earnings ratio of similar companies. However, there is nothing like a market price to establish fair value.
Company management is embarrassed if it offered the company for less than fair value. But the IPO may not be successful if it is over priced. One approach is to create the new company and then offer only some of the stock to the public, i.e. a partial spinoff. Then the rest of the stock is sold later at market price in a secondary offering.
Companies often complain that their assets are not properly valued by their price earnings ratio. Investors complain that they prefer pure plays that they understand over the conglomerates that were popular in the past. A spinoff is one way to resolve this problem in an effort to increase shareholder value.
A spin-off is sort of like a reverse merger. A parent company separates a division of itself and sets it up as an independently operating and independently trading company. Usually, shareholders of the parent company receive shares of the newly formed company.
Sometimes, companies wish to "unlock" the value of a division, believing that the market will more correctly value that division if it operates as an independent company. If they are right, then shareholders will benefit as the total value of the two independent companies increases.
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