A spin-off is one of several ways of spinning off parts of a company. In this article, we explain in detail how this type of process works.
Our wiki also shows when spin-offs are used in practice and what factors need to be taken into account. In addition, we compare the methods with similar approaches to the spin-off of parts of a company.
What is a corporate spin-off?
In the context of a company, a spin-off is the spin-off of an organizational unit from existing structures. A department or an entire business unit thus becomes an independent company as a result of a spin-off.
This is why it is often referred to as a spin-off. As a rule, employees and know-how from the original organization are bundled in the new company. Often, the economic and content-related connection to the parent organization is also maintained.
If the spinning-off company is a stock corporation, the shareholders receive compensation for the sold part of the company. This compensation can be structured in different ways.
Why is a spin-off carried out?
There are several motives for carrying out a spin-off. Particularly often, business units are spun off if they do not fit the core competence of the company or if the company wants to withdraw completely from a certain business area. In many cases, this is the first step towards a complete sale of a part of the company.
If the part of the company is converted into an investment, capital flows into the company in the short term. Accordingly, the spin-off also has the character of a financing instrument.
The spin-off is also particularly relevant in the areas of innovation management, research and development. For example, the spin-off is suitable for companies that have developed a product, service or business model with excellent market opportunities. In this case, there are two advantages.
On the one hand, investors (usually venture capital companies, holding companies or private investors) have the certainty that their financial resources will actually flow completely into the new, innovative spin-off. On the other hand, the spin-off ensures that the core operating business of the parent company can continue unaffected. Even if the spin-off fails, the core business remains unaffected.
In this article, you will learn how to successfully master a carve-out.
What needs to be considered in a spin-off?
The spin-off is a complex process. Several contractual, organizational and corporate law measures must be taken to successfully complete the process. Among other things, the form of the spin-off must be determined. It should also be noted that there should be a joint decision by the parent company and the employees concerned.
A number of points also need to be taken into account with regard to the supply of capital. In most cases, spin-off projects are not financed by banks, but by venture capital firms, investment companies or private investors. These therefore provide the equity or venture capital and thus also bear the entrepreneurial risk.
Investment companies are mainly institutional investors. Compared to lending banks, investors of this type act as partners. Their primary interest is an increase in the value of their investment. The know-how, on the other hand, is provided by the parent company, which is normally an active shareholder.
In order for investors to be attracted and for the increase in value to actually take place, a number of prerequisites must be met. In particular, the following factors should be mentioned:
- Creation of a professional business plan
- Implementation of a suitable management team
- If necessary, partnering with external companies
In the case of technological innovations: Cooperation with universities and technical colleges
Spin-off and shares
If the company is a stock corporation, the shareholders must be compensated in the event of a spin-off so that they do not suffer any financial disadvantage. This is usually done in two ways:
Shareholders receive shares in the new company free of charge (parent company does not generate issue proceeds)
Shareholders receive the right to acquire shares in the new company
If the shareholder does not make use of this right, he can also offer the right to purchase on the stock exchange.
In general, spin-offs are popular with investors, as they sometimes release high values. While the parent company can use its resources to expand its core business, ideally the profitability of the spun-off part of the company increases at the same time. This can lead to higher stock market valuations for both units.
As a result, the sum of the individual parts is then worth more than the former whole. Numerous practical examples show that this calculation often works out. Spin-off shares usually do very well on the stock market.
What is the significance of spin-offs in the field of M&A?
M&A (Mergers & Acquisitions) is a collective term for several corporate transactions. These include mergers and corporate acquisitions as well as various methods of outsourcing. Accordingly, spin-offs are also a subset of M&A.
However, there are other ways of spinning off parts of a company. Equity carve-outs and split-offs are particularly worthy of mention. In the following, we would like to take a closer look at how these approaches differ from spin-offs.
Spin-Off vs. Carve-Out: What are the differences?
Both spin-off and equity carve-out (carve-out for short) are methods by which companies can sell assets – especially business units. The main difference, however, is that in a carve-out, less than 50 percent of a subsidiary’s shares are usually sold to investors. The parent company therefore retains the majority of the capital and thus also entrepreneurial control over the spin-off. At the same time, it can collect the proceeds from the IPO.
In contrast, a subsidiary is completely spun off in a spin-off (sometimes also called a spin-out). In the case of stock corporations, this is done by transferring the shares to the group shareholders.