Spin-Off

In a spin-off, shareholders of the parent company receive shares in the newly separated business, typically in proportion to their existing holdings. After the spin-off, they own shares in two separate companies.

For example, a shareholder who owns 100 shares in a large industrial company might receive 50 shares in a newly independent division after it is spun off, while keeping their original shares.

Companies spin off businesses for several reasons. The division may have different growth prospects, risks or capital needs from the rest of the company. Separating it can allow each company to pursue its own strategy, attract investors who prefer one business over the other, and make it easier for investors to value each part. A spin-off may also be done to avoid a conglomerate discount, where the whole company is valued at less than the sum of its parts.

In many countries, spin-offs can be structured to be tax-free for shareholders if certain conditions are met, which can make them more attractive than selling the division. Studies have found that spun-off companies have often performed well, although results vary considerably.