What is spin offs in divestitures?

Spin offs is the process of creating a new separate legal entity under its own management and board of directors. Parent company distributes the new shares to its existing shareholders.

A brief idea of spin offs is given below −

Main objectives

The main objectives of spin off are as follows −

• Valuation for undervalued assets.

• Undiversification.

• To reduce bureaucracy.

• Promote sponsorship.

• Better performance.

• Corporate divestiture.

Spin off is used as an operational strategy used by companies to create a subsidiary business from a parent company. In this parent company separate some of its business operations and creates a subsidiary or seconded traded entity and shares of the parent company are distributed to newly formed entities.

This new subsidiary unit takes manpower, technology, product lines from its parent company and in return it exchanges predetermined cash. Shares of parent company shareholders are not required to surrender their stock in exchange of stocks in subsidiary units.

Reasons

The reasons for spin off are as follows −

• Spin off reduces the cost of the parent company.

• It creates a tax shield.

• Company administrative structure is reorganized.

• Profitability is increased.

• Workflow is streamlined.