Corporate spin-off

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] It is distinct from a sell-off, where a company sells a section to another company or firm in exchange for cash or securities.

For other uses, see Spin-off.

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:

  • Investing equity in the new firm
  • Being the first customer of the spin-off that helps create cash flow
  • Providing incubation space (desk, chairs, phones, Internet access, etc.)
  • Providing legal, finance, or technology services

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 (SEC) 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.[6] For example, when Agilent Technologies was spun off from Hewlett-Packard (HP) in 1999, the stockholders 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.[7] 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.[8][9][10]

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.[11]

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:

See also

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". The Free Dictionary. Archived from the original on 9 April 2021. Retrieved 10 April 2021.
  3. "Starbursting". The Economist. March 24, 2011. Archived from the original on Aug 7, 2020. 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. Archived from the original on Mar 29, 2016. Retrieved January 17, 2015.
  6. "Division Of Corporation Finance Securities And Exchange Commission Staff Legal Bulletin No. 4 (CF)". SEC.gov. US SEC. 16 September 1997. Archived from the original on 8 March 2022. Retrieved 8 March 2022.
  7. Richards, Graham (2008). Spin-Outs: Creating Businesses from University Intellectual Property. Petersfield, Hampshire: Harriman House. ISBN 9781905641987. Retrieved November 14, 2017.
  8. "Hive up under FRS 102". ICAEW. 1 Dec 2015. Archived from the original on Nov 29, 2022.
  9. "Burges Salmon Guide to group reorganisations and corporate simplifications" (PDF). Burges Salmon. Archived (PDF) from the original on Oct 22, 2022.
  10. Bicknell, Steve (16 March 2012). "Practical Uses for Hive Up and Hive Down". Steve J Bicknell. Archived from the original on Oct 2, 2022.
  11. 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.
  12. "About Isis". Oxford University Innovation. University of Oxford. Archived from the original on November 15, 2013. Retrieved November 14, 2017.
  13. "Spin-out Companies". Oxford University Innovation. University of Oxford. Archived from the original on Jul 7, 2014. Retrieved June 9, 2014.

Further reading
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