Your coworker asked, “what is a stock spin off?” and why is it important? After a brief explanation, she follows up with, “what is the difference between a spin-off and IPO?”. Swiveling your chair around to face her, you tell her this …
What is the Difference between a Spin off and IPO?
The difference between a spinoff and IPO is the ownership structure and the method used to create independently operated companies. Here are the differences that answer the question: What is the difference between a spin off and an IPO?
Spin Off
A spinoff 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 spinoff shares are distributed, pro rata, to the parent company’s shareholders as a dividend. Depending on the terms and conditions of the spinoff 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.
What is the difference between a spin off and 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 spinoff as opposed to an IPO, let’s review:
- Capital Allocation Efficiency – Spinoffs 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 spinoff separation of the businesses can unlock pinned up, unrecognized value within the parent company. This event driven separation creates improved spinoff investor alignment and transparency and potentially resulting in higher long-term valuation for both firms.
- Minimized Regulatory Challenges – IPOs can be market sensitive, complex transactions. Spinoffs have less 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 spinoff 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.
What is the difference between a spin off and 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.
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