Explained: What is a spin-off in corporate terms?

Shreya Chaware
/ Categories: Knowledge, Fundamental
Explained: What is a spin-off in corporate terms?

In essence, a spin-off is similar to a de-merger or divestiture. It is better known as a starburst or spin-out.

A spin-off is an operational corporate strategy wherein the parent company separates a particular division into a new independent publicly traded entity or subsidiary.

The spun-off entity gets its own unique identity divergent from the parent company. They get their own management, employees, assets, products, technologies and become solely responsible for their profits. Usually, the shares of the new entity are distributed to the existing shareholders of the parent company in the form of special dividends.

In essence, a spin-off is similar to a de-merger or divestiture. It is better known as a starburst or spin-out.

Why Spin-Offs?

Now that you’ve got a grasp of what spin-offs are, let’s delve deeper to discern the multitude of reasons behind a spin-off.

Value Unlocking - If a particular business division is consistently generating robust profits and faces bright prospects of future growth, making it more valuable on its own. Then the smart move for the parent company would be to opt for a spin-off and achieve lucrative value unlocking.

At Odds With Long Term Vision – It is a common occurrence that companies tend to over diversify into sectors distant from their core operations during an economic upcycle. Years later when complications arise, the management decides to streamline operations by getting rid of all units that are not in accordance with the company’s long term vision. Hence, they frequently opt for a spin-off.

Spin-offs can be used as a strategy to offload debt or hive off underperforming divisions, thereby improving the financial standing and profitability of the parent company. Parent companies often undertake spinoffs to avoid capital gains tax on the sale of that particular division.

Example of Spin-offs in India:

In 2011, Gujarat headquartered Alembic Ltd operated in two business segments, namely – bulk manufacturing of penicillin and branded pharmaceuticals formulations. While the penicillin unit suffered heavy competition from international players making losses, the pharmaceuticals division was making huge profits and faced vigorous growth opportunities in the future. The management of Alembic Ltd resolved to demerge the pharma division and implemented a spin-off into a new entity known as – ‘Alembic Pharmaceuticals Ltd.’ Alembic Pharmaceuticals got re-rated post the demerger and shareholders experienced tremendous value unlocking. 

Today Alembic Pharmaceuticals and Alembic Ltd stand at a market capitalization of Rs 15,014.47 crore and Rs 2,079.93, respectively.

Conclusion:

A spin-off is a corporate action that aids a company to stay focused on its long-term vision and not get distracted. It furnishes an opportunity for other profitable divisions to step out of the parent company’s shadow, operate on a standalone basis and get recognized by the market and investors in light of its own.

However, investors should conduct thorough research into a spin-off, comprehend the intricacies before taking a call.

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