What is a spinoff?
“Spinoff,” in a corporate or investment context, means a new, independent company created from a division of an existing company or organization. To use a popular example, AOL, currently owned by Time Warner (TWX), will become an independent company, no longer owned by Time Warner, later in 2009.
Spinoffs fall into several sub-categories, some accessible to passive investors, and some not.
- Spinoff Distribution: shares in the new company are delivered as a stock dividend to shareholders in the parent. For example, if you were a shareholder in Viacom in early 2006, you received a dividend of CBS stock. This is the most common category, and most attractive from an investment perspective, for a number of reasons explained in our research.
- IPO Carve-out: instead of distributing shares in the new firm as a dividend, the parent company instead sells a minority stake to the public in an IPO, and keeps the rest. For example, McDonald’s (MCD) held an IPO in 2006 for its Chipotle chain of restaurants. Investors purchased 20% of the company at the IPO, Chipotle became a public company, and McDonald’s held the remaining 80% of the company. This approach is attractive to the parent company shareholders in a hot IPO market, because it immediately values the parent’s stake in the IPO at a premium.
- Exchange offer: shareholders in the parent are offered, but not obliged, to exchange their shares in the parent for shares in the spinoff. For example, McDonald’s in mid-2006 eliminated its remaining 80% stake in Chipotle by offering McDonald’s shareholders such an exchange. Exchanges are typically offered for spinoffs that are already publicly listed, but majority-owned by the parent. The exchange ratio is usually set at a discount to the spinoff’s current market price, creating a certain short-term gain for the shareholder. As a result, such exchange offers are usually oversubscribed.
- Technology spinoff: this term is generally applied to university research programs separated out into commercial ventures. They are typically speculative, typically privately held by the founders, university, and venture capitalists, and thus neither desirable nor available to the typical passive investor.
- Captive spinoff: popular in Japan, Taiwan, Korea and India, this term refers not to a true spinoff, but to a division that becomes a separate accounting entity, still 100% owned by the parent company. These are unavailable to the passive investor.
For more on the subject, you might consider getting our research, or looking at some back issues, both here.