Why does the company decide to spin off a particular line of business/division?

sannin99(雷蒙咨询)

本文发表在 rolia.net 枫下论坛My firm has been advising one client on corporate reorganization. Or in simple terms, to separate certain line of business from the main operation. Because the investors weren't happy with the performance of certain business which has dragged down the overall share price, a number of principle shareholders urged the management to take action to improve the situtation. Stepping away from the real case for a moment, let's refresh ourselves on some theories behind the spin-off concept:

Factors normally considered to justify a spin-off

1. help focus on core business or operation specialization
2. the intrinsic value of certin business was discounted i.e. not reflected in the trading price of the conglomerate company (why? probably the investors and/or anlaysts don't fully figure out the value of the business due to complex business consolidation/combination)
3. Loss of business due to concern about competition (i.e. companies are unlikely to buy from their competitors' subsidiaries)

Tax is always a key consideration in spin-off strategy selection. Investor definitely don't want to pay taxes unnecessarily, so sale of assets is usually less preferable than tax deferred spin off. However, there are actually more sale of assets observed for some accounting gain and cashflow incentive to the management. This is another example of agency conflict between the management and the investors.

Are above theories all applicable in the real world?

a. tax is always applicable as no one wants to pay taxes
b. not all factors are considered or applicable in each case
c. the key is still to looking for respective objectives of different stakeholders and see if you can reconcile among them.
d. Ability to see through complex relationship among stakeholders and negotiate effectively are much more important than knowing the theories.更多精彩文章及讨论，请光临枫下论坛 rolia.net

(#447@52)
Last Updated: 2008-9-16

if 1+1>2, M & A; if 1+1>1, spin off -georges(L乔); 2008-9-16 (#449@52)

" if 1+1>1, spin off "? what does this suppose to mean? -cosmoyx(My way); 2008-9-16 (#503@52)

Good to know! so after the spin-off, that line of business / division becomes a seperate legal entity? -specialday(Joyce); 2008-9-16 (#460@52)

Right. to give you two famous examples, Nortel was a spin-off from Bell Canada, and Tim Horton was a spin-off from Wendy's -georges(L乔); 2008-9-16 (#473@52)

Our company actually spinned off from the parent company 4 yrs ago. Interesting. -buickregal(Motion); 2008-9-16 (#461@52)

A quick question: what's the difference btw Spin-off & Split-off? -cosmoyx(My way); 2008-9-16 (#474@52)

Spin-off: shareholders of parent receive proportional numbers of new entity's share. Split-off: shareholders of parent receive share of new entity in exchange of their shares of the parent. -toysrus(数独精); 2008-9-16 {26} (#476@52)
If my memory is trustable.

Could you kindly elaborate more? -cosmoyx(My way); 2008-9-16 {103} (#479@52)
For Split-off, you mean the New Entity had shares of the parent? if this is a new entity, how possible?

there is normally no share for share exchange in spin-off, which is the case for split off -sannin99(雷蒙咨询); 2008-9-16 {718} (#487@52)
In a spin off, a business is separated out as a stand alone entity which the parent's shareholders will probably receive new shares in this business. You can understand this as a form of dividend in kind. (i.e. you receive a new entity's shares as dividend distribution) after the transaction, there is two trading entities while the shareholders holds two types of shares for two standalone companies respectively.

In a split off, new shares of the new stand alone entity are given in exchange for parent's shares. or you can understand this as a rare form of parent's share buyback using new shares as consideration.

It sounds confusing. but the reality is that split-off is very rare relative to spin-off.

Thanks, you have some examples? -cosmoyx(My way); 2008-9-16 (#493@52)

Are you serious this time? -toysrus(数独精); 2008-9-16 {689} (#488@52)
Spin-off: Company P creates Compay S by spinning off one of its division/business line and gives each of P's shareholder his/her portion of shares of S. So P's shareholders owns P's and S's shares after spin-off. One company becomes two with same base of shareholders, assuming all other things hold unchanged.
Split-off: Company P creates Company S and some of P's shareholders get S's share and give up some or all of their P's shares for exchange. The key here is they have to give up portion or all of their old shares for acquiring new shares.

Although the two restructuring models are similar. The value of the shares of P and S after restructuring could be differ a lot.

split-off is bit confusing and must be rare in reality, can you guys think of any examples? -specialday(Joyce); 2008-9-16 (#491@52)

A good website for understanding corporate restructuring. -toysrus(数独精); 2008-9-16 {76} (#494@52)
http://www.thedeal.com/corporatedealmaker/2006/12/in_praise_of_splitoffs.php
http://www.thedeal.com/corporatedealmaker/2006/12/in_praise_of_splitoffs.php

Thanks! -specialday(Joyce); 2008-9-16 (#496@52)
en, nice. I love Finance! -cosmoyx(My way); 2008-9-16 (#501@52)

Dupont splitted off Conoco-Philips in 1999? -cosmoyx(My way); 2008-9-16 (#495@52)

At what time wasn't I serious? -cosmoyx(My way); 2008-9-16 {1046} (#499@52)
本文发表在 rolia.net 枫下论坛ok, assume we have a firm named "Rolia会计论坛 Co.Ltd", ("the Parent" hereinafter). Two significant shareholders named specialday(Joyce) & toysrus(数独精). Each of them own 10% of the Parent (say, 100shares each, trading at $100 now).

After getting tired of an ass____ named bigbread(匹格), the Parent decided to restructure a subsidiary namly "Roila金融论坛 Co. Ltd", ("the Daughter" hereinafter), with 1000 shares outstanding.

As Spin-off the Daughter, every shareholder of the Parent get 10% of the Daughter, 100 shares. So "specialday(Joyce), the majesty" & "toysrus(数独精), the majesty" now respectively owns 100 shares of the Parent (trading at, say, $ 80 after the spin-off) AND 100 shares of the Daughter (then, should be trading at $20). Since the share price of the Parent decreased accordingly, the total value of the shares they own remain unchanged.

Now, if we Split-off the Daughter company instead. What's the price of the Parent and the Daughter? How many shares does two beautiful ladies own respectively?更多精彩文章及讨论，请光临枫下论坛 rolia.net

你不去做故事大王有点屈才了。 -toysrus(数独精); 2008-9-16 (#507@52)

别转移话题，先说说到底各有多少股新老公司股票。 -cosmoyx(My way); 2008-9-16 (#509@52)

先回答王家到底有几个兄弟？看你会不会数数。 -toysrus(数独精); 2008-9-16 (#510@52)

haha! :) -specialday(Joyce); 2008-9-16 (#511@52)
What's that? -cosmoyx(My way); 2008-9-16 (#512@52)

孺子不可教也！没劲！串门串够够的了，俺回会计论坛liao. -toysrus(数独精); 2008-9-16 (#513@52)

The Macdonald case you posted involves class A, B shares, didn't that complicate the solution? The case I made up is quite straightforward, right? -cosmoyx(My way); 2008-9-16 (#514@52)

Answer: toysrus(数独精) owns 100 shares of the Parent and specialday (Joyce) owns 100 shares of the Daughter。Specialday (Joyce) got kicked out of Rolia会计论坛by toysrus (数独精) and became the BanZhu (major shareholder) of Roila金融论坛。 -specialday(Joyce); 2008-9-17 (#525@52)

Nice. Follow-up questions: -cosmoyx(My way); 2008-9-17 {515} (#533@52)
1) If you mean Specialday (Joyce) owns 0 share of the Parent and 100 shares of the Daughter now, what's the number of outstanding shares of the Parent? 900 or 1000? What's the share price of the Parent after the split-off?

2) what's the share price of the Daughter after the split-off?

3) Could Specialday (Joyce) still own some shares of the Parent? e.g. 50 shares of the Parent and some shares (this number should be calculated relating to the whole value if the Daughter, right?) of the Daughter?

3x.

Split off: after the reorg, each shareholder holds 100% their company respectively (new company, set up to hold assets), and the fair market value of each company is proportionate to the FMV of their shareholding before split-off. -letempsdescerises(混世俗人); 2008-9-23 {491} (#662@52)
Spin off: after reorg, each shareholder holds the same % of shares in the new company(ies); Ie: the composition of the shareholders remain the same (in the absence of other reorg activities.)

Due to the characteristics of these 2 types of reorg, it's not hard to figure out that split off is often used in reorg of closely held companies (a typical situation is when shareholders want to split the assets and go their own way), whereas spin-off is more often used in public held company.

don't forget another important incentive: to raise fund for the main business. examples include GM was about to spin off GMAC, AIG may have to spin off American General. -jlin2(大林和小林); 2008-9-16 (#492@52)

that's one factor affecting spin-off strategies: sale of assets or tax deferred spin-off -sannin99(雷蒙咨询); 2008-9-16 (#500@52)

Unlocking shareholder's value. -cosmoyx(My way); 2008-9-16 (#508@52)

@Edmonton

Why does the company decide to spin off a particular line of business/division?

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