Corporate spin-off

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A corporate spin-off, also known as a spin-out, [1] or starburst, is a type of corporate action where a company "splits off" a section as a separate business. [2]

Corporate action

A corporate action is an event initiated by a public company that will bring an actual change to the securities—equity or debt—issued by the company. Corporate actions are typically agreed upon by a company's board of directors and authorized by the shareholders. Examples of corporate actions include stock splits, dividends, mergers and acquisitions, rights issues, and spin-offs.

Contents

Characteristics

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. [3]

Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. Intellectual property encompasses two types of rights; industrial property rights and copyright. It was not until the 19th century that the term "intellectual property" began to be used, and not until the late 20th century that it became commonplace in the majority of the world.

Technology making, modification, usage, and knowledge of tools, machines, techniques, crafts, systems, and methods of organization

Technology is the collection of techniques, skills, methods, and processes used in the production of goods or services or in the accomplishment of objectives, such as scientific investigation. Technology can be the knowledge of techniques, processes, and the like, or it can be embedded in machines to allow for operation without detailed knowledge of their workings. Systems applying technology by taking an input, changing it according to the system's use, and then producing an outcome are referred to as technology systems or technological systems.

A parent company is a company that owns enough voting stock in another firm to control management and operation by influencing or electing its board of directors. The company is deemed a subsidiary of the parent company.

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

Divestment reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm

In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.

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. [4]

Management Coordinating the efforts of people

Management is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. The term "management" may also refer to those people who manage an organization.

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

Cash flow movement of money into or out of a business, project, or financial product

A cash flow is a real or virtual movement of money:

Internet Global system of connected computer networks

The Internet is the global system of interconnected computer networks that use the Internet protocol suite (TCP/IP) to link devices worldwide. It is a network of networks that consists of private, public, academic, business, and government networks of local to global scope, linked by a broad array of electronic, wireless, and optical networking technologies. The Internet carries a vast range of information resources and services, such as the inter-linked hypertext documents and applications of the World Wide Web (WWW), electronic mail, telephony, and file sharing. Some publications no longer capitalize "internet".

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

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.

Agilent Technologies is an American public research, development and manufacturing company established in 1999 as a spin-off from Hewlett-Packard. The resulting IPO of Agilent stock was the largest in the history of Silicon Valley at the time.

Hewlett-Packard American information technology company

The Hewlett-Packard Company or Hewlett-Packard was an American multinational information technology company headquartered in Palo Alto, California. It developed and provided a wide variety of hardware components as well as software and related services to consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the government, health and education sectors.

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

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. [5] 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

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". [2] For example, Foster's Group, an Australian beverage company, was prepared to sell its wine business. However, due to the lack of a decent offer, it decided to spin off the wine business, which is now called Treasury Wine Estates. [6]

Conglomerate discount

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". [2]

Examples

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

Examples following the second definition of spin-out:

Academia

An example of companies created by technology transfer or licensing:

Mirror companies

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. 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. [9]

See also

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Equity (finance) difference between the value of the assets/interest and the cost of the liabilities of something owned

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References

  1. New Zealand Master Tax Guide (2013 edition) – p. 771 1775470024 CCH New Zealand Ltd – 2013 "Essentially, a 'spinout' involves the transfer by a parent company of shares in a wholly owned subsidiary to the shareholders in the parent. To the extent that there is a common interest in the old and new holding companies, the spinout ..."
  2. 1 2 3 "Starbursting". The Economist . March 24, 2011. Retrieved April 18, 2011.
  3. Zahra, Shaker A. (1 December 1996). "Governance, Ownership, and Corporate Entrepreneurship: The Moderating Impact of Industry Technological Opportunities". Academy of Management Journal . 39 (6): 1713–1735. doi:10.2307/257076.
  4. Wisler, Philip (May 2014). "Spin-off Transactions: A Disaggregation Strategy Promises Rewards". Transaction Advisors. Retrieved January 17, 2015.(subscription required)
  5. Richards, Graham (2008). Spin-Outs: Creating Businesses from University Intellectual Property. Petersfield, Hampshire: Harriman House. ISBN   9781905641987 . Retrieved November 14, 2017.
  6. Nicholson, Chris V. (February 15, 2011). "Foster's to Separate Wine and Beer Businesses in May". DealBook. The New York Times . Retrieved November 14, 2017.
  7. "about Oxford University Innovation". Oxford University Innovation. University of Oxford . Retrieved November 14, 2017.
  8. "Oxford University Innovation spinouts". Oxford University Innovation. University of Oxford . Retrieved June 9, 2014.
  9. "Calculating Tax Basis for Spinoff Investments". Spinoff & Reorg Profiles. Gemfinder. Retrieved June 9, 2014.

Further reading