At the beginning of 2023, Indian conglomerate ITC spun off its hotel business at a 10:1 ratio. If you wonder what a spin off company means, this article is a must-read.
What is a Company Spin Off?
Simply put, a company spin off means selling a business segment of a parent company to build a new company (standalone) out of it. Let us take the example of ITC. ITC has multiple business segments, from hotels to FMCG products and more. However, ITC Hotels became a new entity after ITC spun out its hotel segment.
The parent company’s shareholders are usually given a particular ratio of shares in the new company. In the case of ITC, shareholders of the ITC (parent company) were allotted one share of ITC hotels for every ten shares held in the parent company.
How Does Company Spin off Work?
The parent company sells the entire stake of the spin off company to the shareholders, and the newly formed company gets a new management and name. However, the spin off company’s assets, human resources, and intellectual properties may remain unchanged. In addition, the parent company often offers financial and technological support to the newly formed company.
Reasons for Spin offs
If you want to invest in a spin off company, you must first understand and analyze the reasons behind the spin off. The most usual reasons for spinning a company are –
- To focus on a business segment with higher potential in the long run. When a company has multiple business segments, the focus is divided. Thus, if a business segment has more potential, the parent company may spin it off as a new company with new management to optimize its potential.
- Another reason for the spin-off is the growth prospects between novice and mature businesses. For instance, if company A (parent company) has four business segments, out of which one has been its primary business since the beginning, the segment has now reached its peak and thus offers little growth. The company has entered the other three segments in the past few years, and these segments are offering higher growth prospects. Therefore, it may spin off the first business segment from its remaining three businesses.
- Spin-off also happens when the strategic needs of businesses start deviating from each other. An FMCG and a construction business may not have the exact strategic requirements, right? Therefore, the parent company can spin one of the businesses off.
- Finally, suppose a parent company wants to sell off one of its business segments but cannot find investors. In that case, it may spin off that segment into a new entity, increasing the potential and getting investors.
While there could be different reasons for a spin-off, the basis is the same: it makes the businesses more profitable.
Effects of Spin-off
A company spin-off has effects on both investors and the parent company.
For Investors: Investors or shareholders tend to get better returns after the spin-off as both the parent and the spin-off company get to focus on their independent businesses, which often helps generate better returns. However, the share prices of the new company can become volatile or sluggish, as there is no independent financial performance data from the company’s past.
For Parent Company: The parent company’s stock price usually drops initially as the assets, intellectual properties, and other resources that go to the spin-off company get reduced from the parent company’s books. However, if the spin-off goes right in the long run, the parent company will also benefit, which can be transferred to its shareholders.
Risks of Company Spin Off
Shareholders of the parent company get shares of the spin-off company automatically. However, the stock of this new company may not suit any investors’ portfolio. Thus, the investors need to evaluate whether the prospects and nature of the new company match their investment criteria. If not, then they should drop those shares from their portfolio. This makes the share price of the spin-off company volatile in the initial days of the spin-off.
Recent examples of Company Spin offs in India
There have been some significant spin-offs in 2023. Let’s see the parent and the spin-off company.
|Reliance –Jio Financial Spin-off
|Jio Financial Services
Apart from recent spin offs, if we go back in time, then Bajaj Auto spinning off Bajaj Finance and Bajaj Finserv has churned a lot of wealth. Similarly, Reliance spun off its subsidiaries earlier as well.
Independence is crucial for growth and prosperity, and that is what companies strive for when they think of spin offs. While not all spin-offs become successful, the idea is to generate better profits by focusing more on potential businesses.
What is a company spin off?
Company spin off means separating a business segment of a parent company to make a new company out of it. This is usually done to focus more on potential segments and generate better returns.
What are examples of spin offs?
Recent spin-off examples include Reliance Industries and Jio Financial Services or ITC and ITC Hotels spinoff.
What is an example of a spin-out company?
Often, spin out is referred to as spin, and a recent example could be the ITC, where ITC Hotel was spun out of ITC Group to become an independent entity.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.