In the world of corporate restructuring, companies often explore strategies like spinouts and spinoffs to unlock shareholder value, streamline operations, and refocus on core business activities. While both terms may sound similar, spinouts and spinoffs serve different strategic purposes and have distinct financial and operational implications. In this article, I’ll explain the differences between spinouts and spinoffs, highlight the reasons companies pursue these strategies, and provide examples of notable businesses that have successfully used them to create value.
What is a Spinout?
A spinout, sometimes referred to as an equity carve-out, occurs when a company creates a new, independent entity by selling a minority interest in a division or subsidiary to the public through an initial public offering (IPO). In a spinout, the parent company typically retains a significant ownership stake in the new entity while allowing the spinoff to operate as an independent business.
The primary goal of a spinout is to raise capital for both the parent company and the newly formed entity while retaining a level of control and influence over the spun-out business. Spinouts are commonly used in industries where the new entity may have growth potential that is distinct from the parent company’s core business.
What is a Spinoff?
A spinoff, on the other hand, involves the complete separation of a division, subsidiary, or business unit from the parent company. In a spinoff, the parent company distributes shares of the new entity to its existing shareholders, effectively creating two independent publicly traded companies. Unlike a spinout, the parent company typically has little or no ownership interest in the spinoff after the transaction is completed.
Spinoffs are implemented when a company seeks to divest a non-core business or enable a division with growth potential to operate independently, free from the broader strategic objectives of the parent company. Spinoffs give the new entity full autonomy to pursue its own growth opportunities while providing shareholders with ownership in both companies.
Key Differences Between Spinouts and Spinoffs
Although spinouts and spinoffs share similarities, they differ in several key areas:
Ownership Structure
Spinout: The parent company retains a significant ownership stake in the new entity, which is sold to the public through an IPO. This means the parent company still has influence over the operations and strategic direction of the spinout.
Spinoff: The parent company completely divests the new entity, distributing its shares to existing shareholders. The spinoff operates as an entirely separate company with no ownership ties to the parent.
Control
Spinout: The parent company retains some control over the spinout, as it usually owns a portion of the spun-out entity’s shares. This allows the parent to influence major decisions and retain an interest in the new company’s growth.
Spinoff: In a spinoff, the parent company has no control over the newly formed company. The spinoff is free to operate independently and make decisions without interference from the parent company.
Capital Raising
Spinout: Spinouts are often used to raise capital by selling a portion of the new entity’s shares to public investors. The funds raised from the IPO can be used by both the parent company and the spinout to fuel growth or pay down debt.
Spinoff: Spinoffs do not raise new capital. Instead, they simply transfer ownership of the new entity to existing shareholders. The primary focus of a spinoff is to unlock value and provide shareholders with stakes in two distinct businesses.
Strategic Purpose
Spinout: Spinouts are typically used when the parent company sees value in maintaining partial ownership of the new entity while allowing it to grow independently. Spinouts are common in industries with emerging technologies or business models that need access to public markets.
Spinoff: Spinoffs are used when the parent company wants to streamline its operations, divest non-core assets, or unlock value in a business unit that may be undervalued as part of the larger organization.
Why Companies Pursue Spinouts and Spinoffs
Both spinouts and spinoffs are strategic tools that companies use to create value for shareholders, improve operational focus, and unlock growth potential. Here are some common reasons why companies pursue these strategies:
Unlocking Shareholder Value
In many cases, a division or subsidiary may not be fully valued by the market when it is part of a larger organization. By separating that business through a spinout or spinoff, the market can better assess its value on a standalone basis, potentially leading to higher valuations for both the parent company and the new entity.
Strategic Focus
Spinoffs and spinouts allow both the parent company and the new entity to focus on their respective core businesses. The parent company can streamline its operations and concentrate on its primary growth areas, while the spun-out or spun-off business can pursue its own strategic goals without being constrained by the parent’s broader objectives.
Access to Capital
Spinouts, in particular, provide an opportunity for companies to raise capital through an IPO. The funds generated from selling shares of the new entity can be used to support growth, pay down debt, or fund new investments. Spinoffs, while not typically used to raise capital, can still create value by allowing the new company to attract its own investors and operate independently.
Enhanced Operational Efficiency
By separating non-core or underperforming divisions, companies can streamline their operations and improve overall efficiency. This can lead to better financial performance for both the parent company and the new entity, as each business can focus on its strengths and address its specific challenges.
Examples of Notable Spinouts and Spinoffs
Many well-known companies have successfully executed spinouts and spinoffs to create value for shareholders. Here are a few notable examples:
1. eBay and PayPal (Spinoff)
In 2015, eBay decided to spin off its payments division, PayPal, into a separate publicly traded company. The spinoff allowed PayPal to pursue its own growth strategy in the rapidly expanding digital payments market, while eBay focused on its core ecommerce platform. Both companies have since thrived as independent entities, with PayPal becoming a dominant player in online payments.
2. Agilent Technologies and Keysight Technologies (Spinoff)
Agilent Technologies, a global leader in life sciences and diagnostics, completed a spinoff of its electronic measurement business in 2014, creating Keysight Technologies. The spinoff allowed Agilent to focus on its core life sciences business, while Keysight became a leading provider of electronic test and measurement solutions. Both companies have performed well since the separation.
3. Motorola and Motorola Mobility (Spinoff)
In 2011, Motorola completed the spinoff of its mobile phone business, Motorola Mobility, from its telecommunications equipment division, Motorola Solutions. The spinoff enabled Motorola Solutions to focus on its enterprise and government clients, while Motorola Mobility pursued growth in the consumer mobile market. Shortly after the spinoff, Google acquired Motorola Mobility for its portfolio of mobile patents.
4. MetLife and Brighthouse Financial (Spinout)
In 2017, MetLife completed a spinout of its U.S. retail life insurance business into a separate publicly traded company called Brighthouse Financial. The spinout allowed MetLife to streamline its operations and focus on its core businesses of institutional and global insurance, while Brighthouse Financial concentrated on serving retail clients in the life insurance and annuities markets.
Conclusion
Spinouts and spinoffs are powerful corporate strategies that allow companies to unlock value, raise capital, and focus on their core business activities. Whether a company chooses a spinout to retain partial ownership of a new entity or a spinoff to create a fully independent business, both strategies offer significant benefits for shareholders and management.
By understanding the differences between spinouts and spinoffs, companies can make informed decisions about how to optimize their operations and maximize shareholder value. Notable examples like eBay’s spinoff of PayPal and MetLife’s spinout of Brighthouse Financial demonstrate the potential for growth and value creation that these strategies offer.
Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.
Published by: Holy Minoza
