In the simplest term, a spin off refers to a creation of a new company whenever a parent company sells its division or existing business. A spin off always results in the creation of a new company whose operations are expected to be independent of its parent company. Spin-off is often approached with a philosophy when the parent company wants to focus on its core business activities and finds managing other divisions increasingly difficult or costly. Therefore, a spin-off is approached whereby a separate entity emerges, independent of others.
Spin-off could be voluntary or involuntary. A voluntary spin-off happens when the parent company willingly sells the shares of its subsidiary for obvious reasons. An involuntary spin-off takes place when a parent company is forced to sell its business division due to regulatory requirements.
Reasons for a Spin-off
There could be a variety of reasons for the spin-off in the corporate sector; few of the important ones are outlined as follows:
- The parent company wants to focus on its core activities. The scope for companies to broaden their perspective has risen like never before. Due to globalization and technological advancements, companies find it increasingly attractive to invest in new ventures and expand in new markets as this will increase their profit generation capabilities. However, there comes a point when all the different investment ventures become too much to manage, and companies find themselves as losing their competitiveness in their core business. Therefore, in order to reduce the burden and to focus in the core business, a spin-off is approached.
- Spin-off is done in order to enable both, the parent company and a subsidiary, to perform in the best of their capabilities in the most independent way possible. Sometimes, the parent company and a subsidiary are unable to create a management synergy and due to their unrelated fields, they find the presence of each other burdensome. Therefore, in order to enable each of them to excel in their separate ways, a spin-off becomes necessary.
- A parent company approaches spin-off in order to reach a true capital value in the market. The share values of the parent company could decrease substantially if its subsidiary is not doing well, where the parent company is doing well in its existence. Therefore, in order to eliminate the influence of an ailing subsidiary performance over its share prices, a spin-off is viewed as a viable option.