In a 100 percent spin-off, a parent company issues stock in a subsidiary business in the form of a stock dividend given to existing shareholders. After the transaction, they own 100 percent of the new publicly traded company. This procedure contrasts with an initial public offering (IPO), in which the parent company sells, rather than gives away, part or all of its stake in a division or subsidiary.
Effects on Stock Price
The short-term effect on the spin-off stock typically is negative, because it is distributed to investors who may not want it. They initially invested in the parent company, and they often sell the spin-off stock upon receipt. Institutional investors may sell the stock because of a small or no dividend, or it may not meet their investment criteria. Index funds must sell the stock if it is not a part of a specific index, such as the S&P 500. The parent company's stock generally declines by the value of the spin-off.
The indiscriminate or forced selling of a spin-off stock can create tangible opportunities for investors to acquire a solid business at a good price. Another favorable factor can come into play, as management of the spin-off business often becomes more entrepreneurial, freed from the burdens of a sizable corporate parent. The newly independent company can offer substantial incentives, such as stock options, that can further stimulate growth and profits.
A partial spin-off, also known as a carve-out, involves the parent corporation selling 20 percent or less of the subsidiary in an IPO registered with the SEC. The remaining shares stay with the parent, which may distribute them to existing shareholders in a future spin-off transaction. Companies do this to raise capital and also to establish a benchmark price for the newly public entity. This enables investors and analysts to properly research and value the spin-off company, which ultimately benefits shareholders of the parent company.
A large public company may realize the value of a fully owned subsidiary that is not reflected in its stock price. To make this distinction clear, it may consider a partial spin-off to allow the market to properly price the separate company, which may otherwise remain buried within many other businesses. A transaction of this sort also may make banks and others in the marketplace more willing to lend money or do business with the parent.