What are Spin-offs?

What are Spin-offs?

A spin-off is when a company creates a new, independent company by separating part of its business. Shareholders of the parent company typically receive shares in the new company on a pro-rata basis—meaning they own the same percentage in the spin-off as they do in the parent.

🔍 What Is a Spin-Off?

  • A division or business unit of a parent company becomes a standalone public company.

  • The spin-off company has its own management, financials, and stock ticker.

  • The parent company does this to unlock value, increase focus, or prepare the business for acquisition.

📊 Example:

If you own 100 shares of a parent company, and it spins off 1 share of a new company for every 5 shares owned, you’d get 20 shares of the spin-off.

Real-world example:

  • In 2021, IBM spun off its infrastructure services business into a new company called Kyndryl.

  • IBM shareholders received 1 Kyndryl share for every 5 IBM shares they owned.

 Why Companies Do Spin-Offs:

Reason

Explanation

Sharpen focus

Allows each company to focus on its core business.

Unlock hidden value

Investors can better value each business separately.

Operational efficiency

Each entity operates independently, with its own goals.

Regulatory or strategic reasons

Sometimes required in mergers or due to antitrust concerns.

⚠️ Considerations for Investors:

  • You own two stocks now: One for the parent, one for the spin-off.

  • Stock price adjusts: The parent company’s stock usually drops by the value of the spin-off on the ex-date.

  • Tax treatment varies: Some spin-offs are tax-free; others may trigger a capital gain.

🔄 Types of Spin-Offs:

  1. Pure Spin-Off – Shareholders receive stock in the new company.

  2. Equity Carve-Out – Parent sells part of a division in an IPO.

Split-Off – Shareholders can choose between keeping parent stock or exchanging for spin-off shares.

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