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Spin Off Meaning In Business (All You Need To Know)

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What is a Spin Off?

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Let me explain to you what Spin Off is and why it’s important!

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What Is Spin Off

A spin off is a type of divestiture where a company sells or distributes shares of a business it owns so the business can be managed independently.

In other words, a company sells the shares of a subsidiary or business division so it can be operated as an independent business.

The main objective behind the spin off is to create more value for the shareholders.

If a company considers that a subsidiary or a business division can be better managed and create more value if it’s independent from the parent company, it may spin off that business division.

The spun-off company will start operating as an entirely independent business having its own management team and making its own decisions.

If the spin off is successful, the companies operating separately from one another will create more value than if the spun-off company was managed by its parent entity.

Keep reading as I will further break down the meaning of spin off and tell you how it works.

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How Does A Spin Off Work

A spin off is a term used in business to refer to a company divesting or selling a part of its business.

The way a spin off works is that a company will implement a management team to operate the business division it wants to spin off.

The division will be given a name, get assets, and resources to operate its business.

Then, the parent company distributes all its shares in the spun-off company to its current shareholders in the form of stock dividends.

The shares can also be distributed by having existing shareholders of the parent exchange their shares for shares of the spun-off company.

Once the spun-off company shares are distributed, it will then start operating as an independent entity.

Since it has its management team, intellectual property, assets, and business operations, it will start focusing on its core business operation.

Companies will spin off divisions or business segments if they consider that this can be profitable in the long run.

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Why Do A Spin Off

There are many reasons that can drive a company to spin off a division or business unit.

One reason why you may see a company do a spin off is that it will want to focus more on its core business and spin off a business division that may no longer be part of its long-term vision.

This allows the parent company to focus its attention and resources on what they do best and avoid doing too many things that are time-consuming.

Another reason why a company may spin off a division is that the division is not performing up to the parent company’s standards or may not be growing as expected.

By spinning off that division, the expectation is that the spun-off company will be better able to focus on its growth and long-term profitability.

This can create more value for the parent and spun-off company in the long run.

There can be other reasons why a company may divest a business unit in the form of a spin off.

Ultimately, the expectation (or hope) is that the separated entities will be more profitable than the entities under one management team.

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Spin Off Drawbacks

There are good reasons for some companies to pursue a spin off strategy, however there can be a number of drawbacks.

The most notable drawback is that the division or unit that is spun off does not perform better than it was anticipated.

In other words, the newly created entity fails to create additional value for the shareholders.

Another reason why a spin off may have drawbacks is that many shareholders may end up selling the shares they receive in the new entity.

With the important selling activity, the share price in the spun-off company will be volatile and drop in value.

If the company is unable to show good results, the share price may underperform for an extended period of time.

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Spin Off vs Split Off

What is the difference between spin off and split off?

A spin off is when a company sells or distributes 100% of its shares in a business unit or subsidiary to its current shareholders.

In other words, the shareholders of the existing company will be given new shares of the spun-off company.

The shares are typically distributed as stock dividends.

From that moment on, the new company will operate as an independent company.

On the other hand, a split off is when a company sells or distributes its shares in a business unit or subsidiary by asking its existing shareholders to surrender their shares to get that of the new entity.

This means that the shareholders of the current company must relinquish their shares to get the shares of the new entity.

The new shares are not given in the form of stock dividends but via share exchange.

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Spin Off FAQ

What does spinoff mean?

A spin off is a business strategy where a company creates a new business entity from its existing business.

When a parent company separates part of its business operations from its business to form a new publicly traded company, the transaction is considered to be a spinoff.

The new entity will have its own assets, name, employees, resources, intellectual property, and management team.

Why do companies do spinoffs?

There are many reasons why companies consider spinoffs, such as:

  • Create more value for their shareholders
  • Focus more on their core business
  • Pursue more profitable business activities
  • Sell non-productive business units
  • Reduce operating costs
  • Streamline business operations
  • Focus on specific products and services
  • Improve profitability 

What are examples of a spin off?

Every year, there are many spin offs that take place in the United States.

To give you a few examples of spin offs, here are some notable ones:

  • Eli Lilly and Company spun off Guidant in 1994
  • DreamWorks Studios spun off DreamWorks Animation in 2004
  • Time Warner spun off AOL in 2009
  • CBS spun off Viacom in 1971
  • Tyco International spun off TE Connectivity in 2007
  • Microsoft spun off Expedia Group in 1999

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Business and law blog

Takeaways 

So there you have it folks!

What does spin off mean in business?

In a nutshell, a spin off refers to the process of creating a new company from an existing business.

This happens when an existing business sells a division, a business unit, or a subsidiary.

The new company created from the old one will be operated independently from the existing company and no longer be a subsidiary.

A spin off can happen if the existing company sees that it’s more lucrative to do so, if it has a different strategic vision than its business unit, if the business moves in another direction, or if its business unit is not performing up to its standards.

Although a spin off can have advantages, it can also have its downsides where the separated company does not perform as well as expected or the share price of the spin off becomes too volatile.

Now that you know what “spin off” means and how it works, good luck with your research!

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Author

Amir K.
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and I love it!). I'm also an expert SEO and content marketer. On this blog, I share my experience, knowledge, and provide you with golden nuggets of useful information. Enjoy! Feel free to connect with me on LinkedIn.

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