In the world of investments, corporate spinoffs may cause a bit of confusion. A company was listed as one entity, now a part of it’s services or products became a different company. Why did this happen?
Spin offs occur because they can benefit the original company and provide better value in stock for the shareholders and/or service to the consumers. It may seem straightforward but can actually become complicated due to the receptiveness of the stock market and the value of a spin off’s shares. But what exactly is a corporate spin off and how does it affect stock? Read on to find out more.
What is a Spin off
A corporate spin off is essentially when part of a corporation breaks off into an independent company. In many cases, this occurs because a business started branching off a portion of their focus into a separate product or service, and it made more sense to allow the two functions to operate independently.
Take for example eBay and PayPal – both were operating under the same corporation at one time Then, as time went on eBay decided that the benefits of having both businesses under one roof were minimal, it made sense for PayPal to separate and become it’s own entity. From a branding and an operations perspective, eBay couldn’t continue supporting PayPal as part of it’s own business. Hence, they spun it off.
While eBay and PayPal are one example, it’s estimated that approximately 50 business per year in the U.S. will undergo a spin off. But what does this mean for stocks and shareholders?
What Happens to Stock During a Corporate Spin Off
When a company undergoes a spin off, it splits 100% of it’s ownership as stock dividend to existing shareholders. Or, it may offer a discount to the shareholders to exchange their shares of the parent stock for the spin off.
In many cases, spin offs tend to be low risk and generate more interest since the parent company and spin off can better focus on their specific products or services. Since the company is no longer splitting their resources, both entities tend to perform better on the stock market.
However, it’s not all easy street for the spin off stock. Depending on the market, spin offs can underperform or outperform if the market is too weak or to strong. That’s why it’s important for companies planning a spin off to get the timing just right, based on the temperature of the market.
No matter why a corporate spin off occurred, the hope is that it will allow the parent company and the new business entity an opportunity to thrive and become more profitable as separate businesses.
If you are interested in investing in a spin off business, it pays to do due diligence and research on the parent company and shares of the new entity.