Spin-offs

In a typical spin-off transaction, the parent company "spins off" its subsidiary by distributing all of that subsidiary's stock directly to the parent's stockholders. After the transaction both the parent (P) and the spun-off entity (S) have separate and independent existences with the stockholders of P owning the stock of P and of S.

 

Some of the key reasons why companies decide to do a spin-off are to:

 

·         Enable management to focus its attention on the core business of the company.

·         Allow the spun-off part to received its separate management and other resources.

·         Reduce administrative burdens when several lines of business are managed under the same entity.

·         Separate a subsidiary from parent in preparation for that subsidiary's sale to a third party.

·         Capitalize on stockholder worth in high-growth business lines that may be underrated because their performance is obscured by their attachment to slower-growth businesses.

·         Shed businesses that are no longer wanted and no longer fit within Parent's business plan but that either are illiquid or do not have a current market valuation that Parent believes to be fair.

·         Allow P and S to raise capital and seek financing separately, which may allow either entity (or both) to do so more effectively and efficiently.

·         Establish a takeover defense. Spinning-off a subsidiary may make parent less attractive as a take-over target without destroying value for existing stockholders (as those stockholders get the stock of the subsidiary).

·      Avoid regulations. By spinning off a subsidiary, P and S may not be subject to the same regulatory regime post-transaction as they were pre-transaction and, depending on the cost and administrative burden of the regulations, may unlock stockholder value that would otherwise be suppressed.

·         Eliminate conflicts between business lines.

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