See: Tax-Free Spinoff.
You run a novelty underwear company. You want to get rid of your glow-in-the-dark thong division. You're going to spin it off as its own company.
There are a couple of ways to structure the deal. Some result in capital gains taxes for the parent company. These fall into the "taxable spin-off" category. These happen when the company is sold to an outside party (say, a hedge fund comes in and buys the Bright Thong unit to set it up as its own company). Also, conducting an IPO for the new company could result in taxes for the parent company.
However, you do have choices that avoid the taxes. You can conduct the spin-off in a way that would be tax-free. For instance, you could issue shares of the new Bright Thong's stand-alone company to your shareholders. They would own both the parent company and the new company, in equal proportion.
The tax-free option obviously has the appeal of avoiding taxes. But it doesn't bring in any cash for the parent company. It just serves to separate the businesses. The taxable model can be useful if the goal of the transaction is to raise capital for the parent company.
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Finance: What is a spinoff?0 Views
finance a la shmoop what is a spinoff all right you know Big Bang Theory right
most popular sitcom in the world pretty much [Big Bang Theory on TV]
well it's spin-off is young Sheldon and yeah the jury's still out on that one
and some of the episodes are good some kind of suck right remember Happy Days
yeah if you don't ask your parents Laverne and Shirley came out of it [Happy Days black and white picture]
Frasier came out of cheers Lou Grant came from The Mary Tyler Moore Show a
different world came from The Cosby Show as did about 14 lawsuits and they're
still going on so we can't comment on them well corporate America has [court mallet being struck]
spin-offs that kind of work the same way a dorky old unsexy home building company
build Co which grows slowly and predictably in trades at twelve times
earnings stumbles on a way to leverage robots to build homes for them they make [robot building house]
more money licensing this build technology to the world than their own
home building business itself like they make more unlicensed
the robot home build company is only five percent of the revenues of the home
build part of the business but it's growing at three hundred percent a year
instead of just six and on its own that robot company as a standalone company
would trade at some 50 to maybe a hundred times earnings and on its own
it's worth probably half of the 83 year old old-school homestyle home building [suburban houses]
company already yet build Co gets almost none of the credit in its existing
multiple on Wall Street because it's still relatively small in the scheme of
things that is the robot home building thing at only 5% of revenues is kind of
int well the company wants to work for shareholders ie get them full value for
their investment in the whole company so what does it do mm-hm [spinoff newspaper]
we're thinking what's the title of this video so to optimize shareholder value [Shmoop website]
the company spins off that robot build part of itself into a ai ai oh yes he's
named new McDonald and built a farm and all that yeah well that [robot McDonald]
one trades at a huge multiple by selling twenty percent of itself to the public
build code then owns eighty percent of whatever aia io is valued as being worth
by the public markets after it was spun out as a separately traded public
company from the mothership well almost certainly aia io trades that
have vastly higher multiple than it got credit for trading at the inside of its
mother ship before the spin-off and the new value in the mother ships eighty
percent ownership stake in it causes build co stock price to almost double
well how is all this magic accomplished yes by the spin-off by forcing the
public to put a valuation on this otherwise hidden asset or at least
forgotten once the company added some fifteen twenty thirty percent maybe
double to its market cap which is a good thing for all shareholders maybe not so
good for the human workers of the old-school building company who will [people on strike outside BuildCo]
soon be almost all out of work but will all work for robots someday anyway so
might as well get some practice being subservient [robot McDonald ringing bell for more oil]
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