Going through your monthly portfolio review, you notice how well your spin-off stocks are performing. You recently read about an upcoming IPO and wonder; Is a spin-off the same as an IPO? You must read this!
Is a Spin-Off the same as an IPO?
A spin-off is not the same as an IPO, they differ in the method used to create independently operated companies. Here’s the difference that answers the question: Is a spin-off the same as an IPO?
Spin-Off
A spin-off is an event-driven corporate action occurring when a company divests or separates a division or subsidiary into a standalone entity. The new company operates independently of the parent firm with its own board of directors, management team, assets, liabilities, and employees.
Initially, the spin-off shares are distributed, pro rata, to the parent company’s shareholders as a dividend. Depending on the terms and conditions of the spin-off, the shares may or may not be publicly traded.
Initial Public Offering (IPO)
An IPO is also an event-driven corporate action. When a private firm sells a percentage of its ownership to the public, in the form of shares, it becomes a publicly traded company. This first-time selling of shares is an initial public offering or IPO.
The newly offered shares are sold to investors through domestic and international stock exchanges. The sales proceeds go to the IPO firm and are used for strategic initiative expansion, debt reduction, research and development (R&D), or working capital.
Post-IPO, the shares are openly traded, and their price fluctuates depending on supply and demand and news development of the general economy and the specific company.
Is a spin-off the same as an IPO? They are similar because they created separate operating entities, and they differ in the process used to create the standalone firms. There are some advantages to a spin-off as opposed to an IPO, let’s review:
- Capital Allocation Efficiency – Spin-offs allow the parent company enhanced focus on its core operations and free up the spun-off firm to drive its own strategic objectives. Both scenarios lead to efficient capital allocation increasing short and long-term shareholder value.
- Hidden Value Unleashed – A spin-off separation of the businesses can unlock pinned-up, unrecognized value within the parent company. This event driven separation creates improved spin-off investor alignment and transparency and potentially results in higher long-term valuation for both firms.
- Minimized Regulatory Challenges – IPOs can be market-sensitive, complex transactions. Spin-offs have fewer regulatory challenges and share distribution can be more straightforward. A spin-off, previously a part of the parent company, its separation is a less complicated transaction precipitating faster execution with lower fees.
- Taxable Event – A spin-off is usually not a taxable event for the parent company and its shareholders. An IPO is not taxable for the firm going public, however, may have tax implications for company shareholders, employee stock options, and retail investors who purchase the newly traded IPO shares.
Is a spin-off the same as an IPO? These two corporate events have different methods to arrive at the same destination. They are conduits to unrecognized market value. Evaluating these scenarios is the difference between assessing an entity with a track record or speculating on a brave new world.
Read next: Is a Spinoff considered a Dividend?
