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The Spin Zone
Spin-offs occur very frequently for a reason. They can unlock substantial value for shareholders of the parent corporation. This four-page white paper examines the process, regulations, and reasons involved with spin-offs as well as profiles a few case studies of OTCBB companies involved in spin offs. Poor performance of a subsidiary, unrelated core competencies, transparency, and increased accountability are among the reasons cited by most companies for spinning off a subsidiary. There can also be substantial tax advantages to using a spin-off to divest a line of business. This is a "need to know" paper for any executive functioning in the small equity markets. More and more publicly owned corporations are dividing their businesses, distributing, or "spinning off," one or more of their businesses to their shareholders. Spin-offs typically result from a perception by corporate management that the whole may be less than the sum of its parts. Management may conclude that shareholder values would be maximized by conducting a corporation's businesses in several separately owned corporations rather than in one corporation or in a group of related corporations. In many cases, the linkage of one business with another business in the public eye may reduce the business's attractiveness as an investment. The typical spin-off by a publicly owned company is prompted by the perception by management that the stock of two separate companies would trade at a higher combined price than would the stock of one company conducting the two businesses. Here’s a comprehensive look at this strategy. What a Spin-off is A spin-off is when a parent company distributes shares of a subsidiary to the shareholders of the parent company. This transaction separates the subsidiary from the parent into an independent entity. If completed under certain regulations, spin-offs can be a very tax-effective way of increasing shareholder value. Also known as divisive tax-free reorganizations, spin-offs are becoming increasingly popular in recent years. According to a study by McKinsey, over 300 spin-offs occurred between 1988 and 1998. Total shareholder returns over two years outperformed the S&P 500 27% to 17%. Spin-offs have been touted by analysts who prefer to see pure-plays, rather than diversified conglomerates whose operations can be very opaque. While spin-offs can take place in many different ways, there are two main categories: pure spin-offs and carve-outs. Tracking stocks resemble spin-offs, but in actuality do not separate assets or income streams. Pure Spin-Off 100% of the ownership in a subsidiary is distributed as a stock dividend to shareholders of the parent company. The subsidiary post-dividend is a separate entity with the exact same shareholders as the parent company.
[continued...] Want to know more? Download the White Paper "The Spin Zone" for just $9.95. |
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