Spin Off Process: How To Spin Off A Company
What is the company spin off process?
The company spin off process is the separation of a certain part or parts of an organization’s business operations from the main company so that it becomes its own entity.
What happens to stock when a company spins off?
When a company spins off, all the stock in the new company (SpinCo) is distributed to parent company stockholders. This is different to in an equity carve out, when some of the shares in the newly created company are sold via IPO.
How long does a company spin off take?
Depending on its size and complexity, the company spin off process can take months or even years. However, with advanced divestiture data room software like Ansarada, the process can be dramatically fast-tracked.
See also: Corporate Divestiture Process
Spin off transaction structures
The typical spin off transaction structure is as follows. The parent company distributes all the subsidiary’s stock to the parent stockholders in the form of a dividend, calculated on a pro rata basis according to their existing holdings. Once the distribution is complete, the subsidiary is its own entity and the stockholders hold stock in both the parent and the newly independent company.
In some spin off transactions, only a portion of the subsidiary's stock is distributed while the parent retains the remainder. In both transaction structures, the subsidiary becomes a publicly held company if the parent is publicly held.
It’s worth noting though that spin offs are commonly coupled with other deals. For example, the parent company may decide to sell some of the subsidiary's stock via IPO (aka the carve out process) while the remainder is distributed to the parent stockholders in a spin off. It may spin off the subsidiary as the first step towards a merger with another company. Or it might give its stockholders the opportunity to swap parent stock for subsidiary stock.
Spin off vs IPO
While they sometimes come together, a spin off and IPO are different company transactions. An IPO causes a private company to become publicly listed, whereas a spin off is when a business unit is separated off to become its own company.
How to spin off a company in 7 steps
1. Identify the right management team
EY research between 2002 and 2017 into 124 global spin off transactions revealed that most of the SpinCos that were successful* had named a candidate from the parent company as either CEO or CFO or both. (*Success was defined as having delivered a total shareholder return one year after the spin that was higher than the parent company’s within the same period before the transaction.)
2. Assess the operating model
Companies must acknowledge that operations will inevitably need to change as a result of the spin. The SpinCo will need to be ready to operate as an independent company.
3. Consider the tax implications
With any spin off, there are tax implications. Questions to consider: Will the transaction itself be taxable? What measures will ensure a tax-efficient operating model for both the new company and the parent?
4. Conduct legal and compliance due diligence
Meticulous due diligence will need to be performed to identify and analyze any spin off risks. As part of this, it should be determined whether SpinCo has complied with relevant competition, privacy and data protection laws.
5. Get ready for change
You will need to have ready a communication strategy for employees, shareholders, and other interested parties. Be transparent about the rationale for the spinoff, the timeline, and the expected benefits.
6. Determine the new entity’s identity
Careful consideration will need to be given to SpinCo’s separate identity and go-to-market strategy for long term growth. This should not be left as an after-thought, as it’s fundamental to the success of the spin.
7. Act quickly
EY also reported that slow spins generated negative total shareholder returns, whereas spins executed within 7 to 16 months had positive returns. It’s highly recommended therefore to invest in technology to streamline and optimize the process.