What Is a Spinoff?

Introduction

Sometimes a big company decides it would be better off as two smaller companies. When it separates one of its divisions into a new, independent company, that is called a spinoff. Spinoffs can create exciting opportunities for investors.

How a Spinoff Works

In a typical spinoff, the parent company gives shareholders shares of the new company. For example, if you own 100 shares of the parent, you might receive 50 shares of the new company. The new business then trades on the stock market on its own, with its own management team and strategy.

Why Companies Do It

Companies spin off businesses to sharpen their focus. A company with very different divisions may find that investors undervalue it because it is hard to understand. Splitting lets each business pursue its own goals. Recent examples include General Electric splitting into separate aviation, healthcare, and energy companies, and Kellogg separating its snack and cereal businesses.

What Investors Should Know

Spinoffs can be volatile at first, because some investors sell the new shares they did not ask for. Some studies have found that spinoffs have performed well over time, but results vary. Investors should research each new company's finances and leadership before deciding whether to hold or sell.

Conclusion

Spinoffs show that sometimes smaller and more focused can be better. Understanding them helps you make sense of big business headlines and spot new investing opportunities!