There are many events and phenomena in the stock market, so it is difficult to keep track of all of them. You must keep track of those that are important.

One such event is the "spin-off". It is the subject of this article, as well as its impact on shareholders and investors.

What is a spinoff?

A spin-off is when a company separates or a branch of its business splits off in a separate structure. The parent company creates a subsidiary, transfers some of its assets and liabilities to it, and opens a separate legal entity. The parent company retains its legal entity.

This event should not be confused with the opening of a new company at expense to founders or investors.

A spin-off example

Let's take as an example an imaginary company.

SSS is a manufacturer of construction materials. The company has been gradually expanding its product range. The company then offers a wide range of these products and firmly occupies its market niche.

The management is driven to develop the company and becomes more ambitious. The management decides to take up a new niche: construction and installation.

SSS is a publicly traded company that has shares in a free turnover. They decide to establish a new subsidiary SSS-1 at the general meeting. They also make decisions about all organizational matters, including allocating funds. This can take anywhere from six months to one year.

The new conditionally-owned company acquires assets and liabilities, issues shares and establishes its primary cost. All shareholders of the original company receive a new share.

This is called the exchange rate. It's a ratio between the new shares and the share price of parent company. The decision at the shareholders meeting will determine this.

Here's an example of a exchange rate

SSS shares are 100 USD each. The exchange rate for SSS is 0.85 (85%). The initial share price for SSS-1 will be 85 US dollars. This share price will be used to launch the newly created company, and investors in the parent company will receive multiple shares.

Investors must have a certain amount of shares in the parent company in order to receive shares of the new one. The numbers get rounded: investors will receive 1 share from the subsidiary for every 10 shares of their main company. This means that they will receive 3 shares for each 29 shares of the "old". It is important to ensure that you have enough shares of your parent company before a given date.

A construction company is an example of a spinoff. However, this process is most commonly done in science and technology, in the areas of software development and research.

The main purposes of a spinoff

1. Mobile company.
2. Create a competitive, efficient company.
3. Try to get tax incentives and decrease your debt.
4. Diversifying business risks. The initial company will not suffer if the new project does not develop.
5. You can start a new niche business and develop a business that is different from your existing one.
6. Making final decisions faster. Fewer managers means faster decisions.

The advantages of a spinoff

1. It is more advantageous to create a new company from an existing company than one that is created entirely.
2. All the success of the parent company is used by the new company, even the client base. This makes it easier to promote.
3. A subsidiary is established to meet specific market conditions. It is not necessary to search for a niche.
4. The risk to the parent company is lower.

What is the behavior of investors at a spinoff?

All shareholders of the parent company receive shares in the spin-off. They can be used in many ways.

1. They can be kept in the portfolio by investors, diversifying it. The shares of both companies could continue to grow, but even if one goes down, the portfolio will still be balanced by the shares of the other. Both shares could still fall, but that is up to the shareholders.
2. Investors can dispose of their shares after the subsidiary has completed an IPO and may use the money however they wish. In this instance, the portfolio won't change and investors will get some money. Keep in mind, however, that the shares could grow in the future.
3. Investors can buy more shares if they find the company promising after studying it. The share price of the new company is likely to grow as long as people are greedy and rush to "hot pies".
4. Trading and investing are always risky. Take your time to research the company and determine if it is able to make a profit.

Bottom line

Most often, a spin-off is a positive event for investors and the company. They receive the shares of both the new company and the shares they have.

The share price of the main business might rise after a spin-off or an IPO. Quite often, shares of the old company continue to grow for several months after an IPO.

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