A spinoff is a type of divestiture. It creates an independent company through the sale or distribution of new shares of an existing business or division with assets, employees, intellectual property, technology, or existing products taken from the parent company. A spinoff has occasionally been referred to as a spin out or starbust.
Shareholders of the parent company receive shares in the new company as compensation for the loss of equity in the original firm. Shareholders are then able to trade their shares from either company on a stock exchange independently. This allows investors to narrow and focus their investment to the business they think has the most growth potential. Thus, the spun-off companies are often expected to be worth more as independent entities than as parts of a larger business.
A spinoff may occur for various reasons.
- To focus resources and better manage the division that has more long-term potential
- A company might spin off one of its mature business units that are experiencing little or no growth
- If a portion of the business is diverging strategically from the priorities of the parent company, it may be spun off so it can unlock value as an independent operation
- To separate a unit into its own entity if an acquirer cannot be found
- A regulatory requirement (from the CMA or under HSR for example) during a merger or acquisition (see below)
Example of a Spinoff
On January 30, 2020, WABCO Holdings (WBC) announced via an 8-K filing with the SEC that
it has entered into a definitive agreement to sell R.H. Sheppard Co., Inc. (“Sheppard”) to Bendix Commercial Vehicle Systems LLC (“Bendix”) for $149.5 million.
The announcement went on to say
WABCO is divesting Sheppard in connection with the Antitrust Division of the U.S. Department of Justice’s review of the proposed merger between WABCO and ZF Friedrichshafen AG (“ZF”), and pursuant to the settlement order approved by the U.S. District Court for the District of Columbia.
This demonstrates the complexity of spinoffs and divestitures when executed in the context of a takeover. The Sheppard transaction is dependent on the takeover by ZF Friedrichshafen AG and vice versa. All with the aim of satisfying the regulatory requirements. This may incur deal extension risk as the effective date is delayed. If the deal were to consummate at a much later date, the annualized return could be severely affected. Traders and investors are advised to invest cautiously in deals of this nature as the number of moving parts and stakeholders multiplies.
