Reading an article on spin-off stocks, you learn Hewlett Packard performed a spin off and Alphabet, Inc. created a spin out. Puzzled, you wonder, what is the difference between a spin off and a spin out? Keep reading because …
What is the Difference between a Spin-Off and a Spin Out?
The difference between a spin-off and a spin out is that a spin-off is a divested operating division of a firm and a spin out is a separate entity created from the intellectual property of a larger organization. Both corporate actions result in an independently operated subsidiary or company, however, the creation process differs. What is the difference between a spin-off and a spin out? here’s how they differ:
Spin-Off – A spin-off is a divested or a separated portion of the parent company. The newly formed corporate entity (ie. "spinco") operates as an independent standalone business and usually distributes a portion of its shares to the parent firm’s existing shareholders. Though the spin-off acts independently, the parent company often retains a stake in the newly traded company.
Here we can actually distinguish between a "complete spin-off" or "full spin-off" and a "partial spin-off." A complete spin-off completely separates the spinco from the parent, while a partial spin-off only spins off a (sometimes very large) portion of the business.
Why a partial spin off? Why not simply do a full spin off all the time?
As with most things, if it's not death, it comes down to taxation. A full spin off usually occurs later, because to do a large complete spin-off at once would trigger an immediate taxable event. The parent can mitigate the tax burden by spreading the sale of its remaining 20% stake over time.
Spin Out – A spin out is created by using proprietary research, technology, and intellectual property owned and developed within the parent company to form a new independently operated company or subsidiary. These organizational units tend not have been operating as a business prior to the spin out, so the parent creates a new operating division from scratch and then spins it out to shareholders.
Widely used by research firms and academic institutions, spin outs seek to monetize the patents, trademarks, research, and technology through a new entity formation. The initial investors and researchers are partial stakeholders in the new firm.
What is the difference between a spin-off and a spin out? The difference is a spin-off is an existing division of a larger organization that is separated or spun off into a standalone firm. A spin out is created from the transfer of intellectual assets of an existing company or institution to form an independent company.
What is an Example of a Spin-Off?
Hewlett is an example of a spin-off. In 2015, the firm, deciding their diverse products and services could be better served by separate entities, formed the spin-off, Hewlett Packard Enterprises, Inc. (HPE).
HPE concentrates on enterprise servers, networking and consulting services, and storage. HP focuses on the printing business and personal services including printers, PCs, and support services.
The spin-off allowed both firms to concentrate on different market segments, pursue dedicated growth initiatives, and unlock pinned-up shareholder value.
What is an Example of a Spin Out?
Alphabet is an example of a spin out. Alphabet, in 2013, began an internal project mandated to develop autonomous vehicle technology utilizing Google’s artificial intelligence and machine learning expertise.
In 2016, Waymo was spun out by Alphabet into a separate subsidiary focused on self-driving technology. Waymo’s independence resulted in a laser focus on its initiative to develop and commercialize autonomous vehicles and cultivate collaborative industry partnerships.
It should be noted, that Waymo is a privately held company, and not all spin outs result in publicly traded firms.
What is the difference between a spin-off and a spin out? Spin-offs and spin outs have the creation of independently operated entities in common, but their paths to formation differ. The benefits of dedicated focus and streamlined operations are also shared along with the overriding goal to increase shareholder value.
Read next: Is a Spin-off the Same as an IPO?
Evan Bleker also contributed to this article.
