Question

Any example of Spinoffs? Have these created value for shareholders?

Answer 1

• A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. A spinoff is a type of divestiture. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.

Why companies choose to do a spinoff:

• There is a variety of reasons a company may want to spin off a portion of its business. For instance, if a portion of its business is heading in a completely different direction and has different strategic priorities, allowing this portion to operate independently can unlock value.
• This was the main reason for the eBay/PayPal split. eBay and PayPal were heading in different directions, and creating two independent entities allow the directors of each to focus on their core operations instead of worrying about a broader spectrum of business activities.
• Plus, spinoffs allow investors to buy shares in a more specific type of business that fits their investment objectives. For example, if someone wants to add a financial company, they can now buy shares of just PayPal without simultaneously investing in eBay's e-commerce business.

Whatever the reason for a particular spinoff, the common ground is that management feels the company will create more shareholder value with the assets separated.

The stock price: before and after

A company's stock price after completing a spinoff depends on whether any of the spun-off entity was retained.

In a complete spinoff, the stock price of the company right before the spinoff should theoretically be equal to the sum of its post-spinoff stock price plus the initial stock price of the spun-off company. For example, if a company whose stock trades for $50 spins off a subsidiary in its entirety at an initial price of $20 per share, its stock price should theoretically fall to exactly $30. Of course, because stock prices are continuously changing in a liquid stock market, it's unlikely to be exactly equal to the original share price minus the spun-off share price, but it should be close.

If the parent company retains a portion of the spun-off entity, it's a little more complicated.

Let's consider an example of a company whose market capitalization is $10 billion with 100 million outstanding shares, which translates to a share price of $100. And let's also say that this company wants to spin off 50% of one of its business divisions, which is valued at $2 billion, at an initial share price of $20 (100 million shares).

Well, because the parent company is retaining 50% of the spun-off company, its share price should be equal to the value of its business, plus the retained 50% stake in the spun-off division. In this case, the remaining part of the parent company is worth $8 billion, or $80 per share, and the 50% stake in the spun-off entity is worth $1 billion, or another $10 per share, for a total (theoretical) post-spinoff share price of $90.