Corporate spin-off
A corporate spin-off, also known as a spin-out or a starburst, refers to a type of corporate action where a company "splits off" sections of itself as a separate business.[1]
The common definition of a spin-off is when a division of a company or organization becomes an independent business. The "spun off" company takes assets, employees, intellectual property, technology, or existing products from the parent organization. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks; thus, at the moment of spinning off, the ownership of the original and spun off companies are identical. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest in only the portion of the business they think will have the most growth.
Many times the management team of the new company are from the same parent organization. Often, a spin-off offers the opportunity for a division to be backed by the company but not be affected by the parent company's image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment.
In most cases, the parent company or organization offers support doing one or more of the following:
- investing equity in the new firm,
- being the first customer of the spin-off (helps to create cash flow),
- providing incubation space (desk, chairs, phones, Internet access, etc.) or
- providing services such as legal, finance, technology, etc.
All the support from the parent company is provided with the explicit purpose of helping the spin-off grow.
U.S. SEC definition
The United States Securities and Exchange Commission's definition of "spin-off" is more precise. Spin-offs occur when the equity owners of the parent company receive equity stakes in the newly spun off company. For example, when Agilent Technologies was spun off of Hewlett-Packard in 1999, the stock holders of HP received stock in Agilent.
A company not considered a spin-off in the SEC's definition but considered by the SEC as a technology transfer or licensing of technology to the new company may also be called a spin-off in common usage.
Other definitions
A second definition of a spin-out is a firm formed when an employee or group of employees leaves an existing entity to form an independent start-up firm. The prior employer can be a firm, a university, or another organization. Spin-outs typically operate at arm's length from the previous organizations and have independent sources of financing, products, services, customers, and other assets. In some cases, the spin-out may license technology from the parent or supply the parent with products or services; conversely, they may become competitors. Such spin-outs are important sources of technological diffusion in high technology industries
Spin-off examples
Some examples of spin-offs by the SEC definition:
- Guidant was spun off from Eli Lilly and Company in 1994, formed from Lilly's Medical Devices and Diagnostics Division.
- Agilent Technologies spun off from Hewlett-Packard in 1999, formed from HP's former test-and-measurement equipment division.
- Cenovus Energy was spun off from Encana Corporation in 2009.
- Ocean Rig UDW Inc was spun off from Dryships Inc in September, 2011.
- AOL was a spin-off of Time Warner; this effectively was a demerger, as AOL had previously merged into Time Warner.
- DreamWorks Animation was spun off from DreamWorks Studios in 2004.
- Nuage Networks was spun off of Alcatel Lucent in 2012
- News Corporation's publishing operations (and its broadcasting operations in Australia) were spun off as News Corp in 2013. The previous News Corporation's remaining media properties were retained under the name 21st Century Fox.
An example of companies created by technology transfer or licensing:
- Oxford NanoLabs and Oxford RF Sensors were set up to commercialize technology based on University of Oxford research, and have been "spun off" by Isis Innovation, the technology transfer arm of the University.
Examples following the second definition of spin-out:
- Shugart Associates was a spin-out of IBM.
- Fairchild Semiconductor was a spin-out of Shockley Transistor; the founders were Shockley's "traitorous eight".
- Intel was in turn a spin-out of Fairchild, as were a large number of firms in the semiconductor industry.
Mirror company formation
Mirror company formation is a specialized form of spin-off used to create a new public company. It simplifies the process of listing the shares on a public stock exchange.
It works by an existing public company issuing a bonus share at a rate of 1 for 1 in the new company. This new company is then sold to another company that does not want to go through the complex and expensive process of issuing a prospectus. The company that purchases the 'shell' then does a reverse takeover, to transfer an operating business into the new company. This is often called a "backdoor listing".
The advantages are the original company sells a shell for much more than it cost to create and the shareholders of the public company receive shares in a new operating business. For the operating company it is much faster and possibly also cheaper than the normal requirements of complying with the listing requirements of most exchanges.
The London Stock Exchange Alternative Investment Market is considered the best market for new ventures as the market is large and has many international companies listed. Also, the time and effort required to achieve a listing is much shorter than many other markets. It typically costs at least USD 1 million to form a public company and list on a stock exchange.
In the United States, a mirror company may be formed tax-free by complying with the requirements of Internal Revenue Code section 355.
Notes
- ↑ "Starbursting". Economist. Mar 24, 2011. Retrieved 18 April 2011.
See also
References
- EIRMA (2003) Innovation Through Spinning In and Out Research Technology Management, Vol. 46, 63-64.
- Richards, G. (2009). Spin-Outs: Creating Businesses from University Intellectual Property. Harriman House. ISBN 978-1-905641-98-7
- Rohrbeck, R., Döhler M. and H. M. Arnold (2009): "Creating growth with externalization of R&D results - the spin-along approach" Global Business and Organizational Excellence, 28, 44-51.
- Rohrbeck, R., Hölzle K. and H.G. Gemünden (2009): "Opening up for competitive advantage - How Deutsche Telekom creates an open innovation ecosystem" R&D Management, Vol. 39, S. 420-430.
- Zahra, S.A. (1996) Governance, ownership, and corporate entrepreneurship: The moderating impact of industry technological opportunities, Academy of Management Journal, Vol. 39, 1713-1735.
Further reading
- Graham Richards (2009). Spin-Outs: Creating Businesses from University Intellectual Property. Harriman House. ISBN 978-1-905641-98-7
External links
- Isis Innovation at University of Oxford
- Library House: UK University Spin-out Companies
- PhD theses on corporate spin-offs
- Allocation of Tax Basis after Spinoffs
