Corporate spin-off

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A corporate spin-off, also known as a spin-out, [1] or starburst or hive-off, [2] is a type of corporate action where a company "splits off" a section as a separate business or creates a second incarnation, even if the first is still active. [3]

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. [4]

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. [5]

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

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.

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. [6] 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.

Terms such as hive-up, hive down or hive across are sometime used for transferring a business to a parent company, a subsidiary company or a fellow subsidiary. [7] [8] [9]

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". [3] 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. [10]

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". [3]

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:

U.S. tax treatment

In the United States, a spin-off may be executed by complying with the requirements of Internal Revenue Code section 355. [13]

See also

Related Research Articles

Agilent Technologies, Inc. is an American analytical instrumentation development and manufacturing company that offers its products and services to markets worldwide. Its global headquarters is located in Santa Clara, California. Agilent was 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.

Technology transfer, also called transfer of technology (TOT), is the process of transferring (disseminating) technology from the person or organization that owns or holds it to another person or organization. These transfers may occur between universities, businesses, governments, across geopolitical borders, both formally and informally, and both openly and secretly. Often it occurs by concerted effort to share skills, knowledge, technologies, manufacturing methods, samples, and facilities among the participants. To ensure that scientific and technological developments are accessible to a wider range of users who can then further develop and exploit the technology into new products, processes, applications, materials, or services. It is closely related to knowledge transfer. Horizontal transfer is the movement of technologies from one area to another. At present transfer of technology is primarily horizontal. Vertical transfer occurs when technologies are moved from applied research centers to research and development departments.

Foresight (futures studies) Term referring to various activities in futurology

In futurology, especially in Europe, the term foresight has become widely used to describe activities such as:

Open innovation is a term used to promote an information age mindset toward innovation that runs counter to the secrecy and silo mentality of traditional corporate research labs. The benefits and driving forces behind increased openness have been noted and discussed as far back as the 1960s, especially as it pertains to interfirm cooperation in R&D. Use of the term 'open innovation' in reference to the increasing embrace of external cooperation in a complex world has been promoted in particular by Henry Chesbrough, adjunct professor and faculty director of the Center for Open Innovation of the Haas School of Business at the University of California, and Maire Tecnimont Chair of Open Innovation at Luiss.

Varian Associates was one of the first high-tech companies in Silicon Valley. It was founded in 1948 by Russell H. and Sigurd F. Varian, William Webster Hansen, and Edward Ginzton to sell the klystron, the first vacuum tube which could amplify electromagnetic waves at microwave frequencies, and other electromagnetic equipment. Varian Associates split into three companies in 1999: Varian Medical Systems, Varian, Inc. and Varian Semiconductor.

APriori Capital Partners

aPriori Capital Partners is a private equity investment firm focused on leveraged buyout transactions. The firm was founded as an affiliate of Credit Suisse and traces its roots to Donaldson, Lufkin & Jenrette, the investment bank acquired by Credit Suisse First Boston in 2000. The private equity arm also manages a group of investment vehicles including Real Estate Private Equity, International Private Equity, Growth capital, Mezzanine debt, Infrastructure, Energy and Commodities Focused, fund of funds, and Secondary Investments.

Mallinckrodt Irish domiciled pharmaceutical

Mallinckrodt Pharmaceuticals is an American-Irish domiciled manufacturer of specialty pharmaceuticals, generic drugs and imaging agents. In 2017 it generated 90% of its sales from the U.S. healthcare system. While Mallinckrodt is headquartered in Ireland for tax purposes, its operational headquarters are in the U.S. Mallinckrodt's 2013 tax inversion to Ireland drew controversy when it was shown Acthar was Medicaid's most expensive drug.

Strategy& is the strategy consulting business unit of PricewaterhouseCoopers (PwC), one of the Big Four professional service firms. Founded by Edwin G. Booz as Business Research Service in Chicago in 1914, the firm underwent numerous name changes before settling on Booz Allen Hamilton in 1943. In 2008, it split from Booz Allen Hamilton as Booz & Company, and in 2013 it was acquired by PwC, the largest consulting acquisition of the company's history. The contract required PwC to drop the Booz name, and the unit became known as Strategy& in 2014. At the time of acquisition, the company had more than 80 offices in 41 countries.

Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies. CVC is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage." Examples of CVCs include GV and Intel Capital.

Tenaya Capital

Tenaya Capital is a venture capital firm with offices in Portola Valley, California, and Wellesley, Massachusetts. Founded in 1995 as Lehman Brothers Venture Partners, Tenaya spun out to become an independent firm in 2009 following Lehman's bankruptcy. It opened its seventh fund in 2015. In 2009 the firm had approximately $750 million under management.

Oxford University Innovation

Oxford University Innovation Limited (OUI) is a British technology transfer and consultancy company created to manage the research and development (R&D) of University spin-offs. OUI is a wholly owned subsidiary of the University of Oxford, and is located on Botley Road, Oxford, England. OUI was previously known as Isis Innovation (1988–2016) and Oxford University Research and Development Ltd (1987–1988).

Equity carve-out (ECO), also known as a split-off IPO or a partial spin-off, is a type of corporate reorganization, in which a company creates a new subsidiary and subsequently IPOs it, while retaining management control. Only part of the shares are offered to the public, so the parent company retains an equity stake in the subsidiary. Typically, up to 20% of subsidiary shares is offered to the public.

Corporate foresight has been conceptualised as a set of practices, a set of capabilities and an ability of a firm. It enables firms to detect discontinuous change early, interpret its consequences for the firm, and inform future courses of action to ensure the long-term survival and success of the company.

University spin-offs transform technological inventions developed from university research that are likely to remain unexploited otherwise. As such, university/academic spin-offs are a subcategory of research spin-offs. Prominent examples of university spin-offs are Genentech, Crucell, Lycos and Plastic Logic. In most countries, universities can claim the intellectual property (IP) rights on technologies developed in their laboratories. In the United States, the Bayh–Dole Act permits universities to pursue ownership of inventions made by researchers at their institutions using funding from the federal government, where previously federal research funding contracts and grants obligated inventors to assign the resulting IP to the government. This IP typically draws on patents or, in exceptional cases, copyrights. Therefore, the process of establishing the spin-off as a new corporation involves transferring the IP to the new corporation or giving the latter a license on this IP. Most research universities now have Technology Licensing Offices (TLOs) to facilitate and pursue such opportunities.

Keysight Technologies, or Keysight, is an American company that manufactures electronics test and measurement equipment and software. In 2014, Keysight was spun off from Agilent Technologies, taking with it the product lines focused on electronics and radio, leaving Agilent with the chemical and bio-analytical products.

Fortive is an American diversified industrial technology conglomerate company headquartered in Everett, Washington. Fortive was spun off from Danaher in July 2016. Mitchell Rales and Steven M. Rales, Danaher's founders, retained board seats with Fortive after the separation. At the point of its independent incorporation, Fortive immediately became a component of the S&P 500. In 2016, Fortive controlled over 20 businesses in the areas of field instrumentation, transportation, sensing, product realization, automation, and franchise distribution. Later the transportation, automation and franchise distribution businesses would be spun off. In 2018 and 2019, Fortune named Fortive as a Future 50 company. In 2020, Fortune named Fortive one of the world's most admired companies along with other major tech companies like Apple, Amazon, and Microsoft. 2020 also marked the third year in a row Fortive has been named to the Fortune 500.

Clusters of Innovations (COI) have been defined in 2015 as "global economic hot spots where new technologies germinate at an astounding rate and where pools of capital, expertise, and talent foster the development of new industries and new ways of doing business."

David Shrier American, futurist and author

David L. Shrier is an American futurist, author and entrepreneur. Shrier also co-edits the MIT Connection Science imprint of MIT Press and is the author of various industry reference books in the fields of financial technology, digital identity, data governance and financial innovation. Shrier is the cofounder & Managing Director of Esme Learning, an artificial intelligence-enabled digital learning company derived from MIT research and spun out of MIT Media Lab. He currently serves as Professor of Practice in Artificial Intelligence and Innovation with Imperial College London.

Young Sohn

Young Sohn (Korean: 손영권) is a Korean-American business executive and investor. He is the president and chief strategy officer of Samsung Electronics. Sohn is also the chairman of the board of Harman International Industries, a subsidiary of Samsung Electronics.

Oxford Sciences Innovation is an early-stage venture capital firm with over $800M in AUM based in Oxford, UK. It operates in partnership with the University of Oxford, as the University's preferred investor, several prominent financiers back the firm, including Google Ventures, Sequoia Capital, Tencent, Huawei and Invesco. The firm uses academic research from the university's science departments to form commercial businesses, also known as spin-outs.

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. "Definition of 'hive off'" . Retrieved 10 April 2021.
  3. 1 2 3 "Starbursting". The Economist . March 24, 2011. Retrieved April 18, 2011.
  4. 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. JSTOR   257076.
  5. Wisler, Philip (May 2014). "Spin-off Transactions: A Disaggregation Strategy Promises Rewards". Transaction Advisors. Retrieved January 17, 2015.(subscription required)
  6. Richards, Graham (2008). Spin-Outs: Creating Businesses from University Intellectual Property. Petersfield, Hampshire: Harriman House. ISBN   9781905641987 . Retrieved November 14, 2017.
  7. "Accounting for a hive up under FRS 102". August 2019.
  8. "Burges Salmon Guide to group reorganisations and corporate simplifications" (PDF).
  9. "Practical Uses for Hive Up and Hive Down".
  10. 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.
  11. "about Oxford University Innovation". Oxford University Innovation. University of Oxford. Archived from the original on November 15, 2013. Retrieved November 14, 2017.
  12. "Oxford University Innovation spinouts". Oxford University Innovation. University of Oxford . Retrieved June 9, 2014.
  13. "Calculating Tax Basis for Spinoff Investments". Spinoff & Reorg Profiles. Gemfinder. Retrieved June 9, 2014.

Further reading