What is a Spin-Off?
The spin-off is one of several possibilities to outsource areas of a company. In this article, we explain in detail how processes of this kind take place.
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Our Wiki also shows when spin-offs are used in practice and which factors need to be taken into account. In addition, we compare the methods with similar approaches to the spin-off of business units.
What is a spin-off of a company?
In the context of a company, a spin-off is the spin-off of an organizational unit from existing structures. A department or an entire business unit thus becomes an independent enterprise as a result of a foundation. Therefore you are also often told about a so-called spin-off. As a rule, employees and know-how from the original organisation are bundled in the new company. In addition, the economic and content connection to the parent organisation is often maintained.
If the spin-off company is a stock corporation, the shareholders (shareholders) receive a settlement for the part of the company sold. This compensation can be structured differently (see section "Spin-off and Shares").
Why is a spin-off carried out?
There are several reasons for performing a spin-off. Business units are particularly often spun off if they do not fit the company's core competence or if the company wishes to withdraw completely from a particular business segment. In many cases this is the first step towards a complete sale of a part of the company. If the part of the company is converted into a participation, capital flows to the company at short notice. Accordingly, the spin-off also has the character of a financing instrument.
The spin-off is also particularly relevant in the areas of innovation management, research and development. For example, spin-offs are suitable for companies that have developed a product, service or business model with excellent market opportunities. In this case there are two advantages. On the one hand, investors (mostly venture capital companies, holding companies or private investors) have the certainty that their financial resources will actually flow completely into the new, innovative offshoot. On the other hand, the spin-off ensures that the parent company's core operating business can continue unimpeded. Even if the spin-off fails, the core business remains unaffected.
What do I need to bear in mind during spin-off?
Spin-off is a complex process. Several contractual, organizational and legal measures must be taken in order to complete the process successfully. Among other things, the form of independence should be defined. It should also be noted that the parent company and the employees concerned should have a common decision-making process.
Some points must also be taken into account with regard to the supply of capital. Most spin-off projects are not financed by banks, but by venture capital firms, investment companies or private investors. They therefore provide the equity or risk capital and thus also bear the entrepreneurial risk. Investment companies are mainly institutional investors. Compared to lending banks, investors of this kind act as partners. Their primary interest is to add value to their investment. The know-how, on the other hand, is provided by the parent company, which is normally an active shareholder.
In order for investors to be attracted and for the increase in value to actually take place, a number of prerequisites must be met. The following factors should be mentioned in particular:
- Preparation of a professional business plan
- Implementation of a suitable management team
- Partnering with external companies, if applicable
- With technological innovations: Cooperation with universities and technical colleges
Spin-Off and Shares
In the case of a public limited company, the shareholders must be compensated in the event of a spin-off so that they do not suffer any financial disadvantage. This is usually done in two ways:
- Shareholders receive shares of the new company free of charge (parent company achieves no issue proceeds)
- Shareholders receive the right to acquire the shares of the new company
If the shareholder does not exercise this right, he may also offer the right to purchase on the stock exchange.
In general, spin-offs are popular with investors, as they release high values in some cases. While the parent company can use its resources to expand its core business, the profitability of the divested business unit ideally increases at the same time. This may lead to higher market valuations for both units. As a result, the sum of the individual parts is then worth more than the former whole. Numerous practical examples show that this calculation is often successful. Spin-off shares usually perform very well on the stock market.
What is the significance of spin-offs in M&A?
M&A (Mergers & Acquisitions) is a collective term for several corporate transactions. This includes mergers and acquisitions as well as various outsourcing methods. Accordingly, spin-offs are also part of M&A. However, there are other possibilities for the spin-off of parts of the company. Particular mention should be made of equity carve-out and split-off. What these approaches differ from spin-offs in terms of, we would like to take a closer look at in the following.
Spin-Off vs. Carve-Out: What are the differences?
Both spin-offs and equity carve-outs are methods by which companies can sell assets, especially business units. The main difference, however, is that in a carve-out less than 50 percent of the shares of a subsidiary are usually sold to investors. The parent company therefore retains the majority of the capital and thus also entrepreneurial control over the spin-off. At the same time, it may receive income from the IPO.
In contrast, a spin-off (also known as a spin-out) involves the complete spin-off of a subsidiary. In the case of stock corporations, this is done by transferring the shares to the group shareholders.
What is the difference between spin-off and split-off?
Analogous to the spin-off, shareholders are also offered shares in a subsidiary in the case of a split-off. However, at split-off, shareholders must decide by definition whether they wish to continue to hold the parent company's shareholding or shares in the subsidiary. In detail, there are two options:
- continue to hold shares of the parent company
- Exchange all or some shares of the parent company for shares of the subsidiary company
In most cases, a split-off occurs when minority interests in a subsidiary have already been floated on the stock exchange by means of a carve-out. This method can be used to define the market price, which then represents the offer basis or exchange ratio for the shareholders.
Spin-off from companies: examples
More recently, several companies have carried out spin-offs. A prominent example is the Bayer Group, which floated its chemicals subsidiary Lanxess on the stock market in 2005 by transferring it to existing stockholders. 99 percent of the shareholders present approved this procedure at a preceding extraordinary general meeting. Lanxess was quickly restructured under new management. As a result, the share price increased by more than 200 percent. Patient investors were thus able to benefit massively.
Another well-known example of a spin-off is Osram. The company was created through a spin-off from Siemens and was thus floated on the stock exchange in 2012. The required three-quarter majority was achieved at the Annual Shareholders' Meeting of Siemens AG in January 2013. Each Siemens shareholder received one Osram Licht AG share for ten Siemens shares. Until 2017, Simens itself held a 17 percent share.
E.ON also carried out a spin-off. In 2016, the Group spun off its Uniper energy company in this way. In this case, E.ON shareholders also received Uniper shares at a ratio of 10:1.
How are spin-offs taxed?
Both companies and investors regularly ask themselves which tax aspects have to be considered for spin-offs. Let's stick to one of the above examples to illustrate the background.
When the Siemens subsidiary Osram went public, the so-called "Amtshilferichtlinienumsetzungsgesetz" was amended almost simultaneously. Among other things, some passages of the Income Tax Act were newly regulated. Since then, investors holding spin-off shares have been particularly affected.
In the model Osram case, Siemens shares were exchanged for Osram shares at a ratio of 10:1. This process initially led neither to profits nor losses for investors. The spin-off was therefore tax neutral.
However, the acquisition costs must now be apportioned 10:1 between the securities of the two companies. This resulted in an individual purchase price for each Osram shareholder. For example, if a shareholder had purchased 10 Siemens shares in 2009 for 77 euros each, the total value of his package was 770 euros.
The investor then received one Osram share for every ten shares in the spin-off. One eleventh of the acquisition cost - i.e. 70 euros - is therefore the purchase price for the Osram share. If the share were sold today at a price of 20 euros, for example, this would represent a tax-relevant loss. Conversely, the tax-relevant gain on the sale of Siemens shares would be higher, as the cost of acquisition would have been
Meinolf Schäfer, Senior Director Sales & Marketing
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