Spin-Offs: Why Do Companies Do It, And What They Might Mean To Your Portfolio William Hubbard, Benzinga
, also known as GE Capital, spun off on Thursday.
Earlier in the week,
received a private letter ruling from the IRS, regarding the tax implications of a spin-off consisting of its fiber and copper network.
The recent discussion and interest in companies shedding business units raises an important question for investors: What, exactly, is a spin-off?
A spin-off occurs when a company identifies a business segment and separates it by creating an independent, publically-traded company.
Why Spin-Off A Business Segment?
Companies elect to spin-off a business segment for a variety of reasons, usually dealing with focusing those businesses on core competencies. A spin-off allows each business to put in place operational and strategic plans that utilizes all forms of capital, including physical and human, without sacrificing another business segment.
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Each company can also benefit from being able to more effectively manage its identity with investors. Companies that focus in one area make it easier for investors to see opportunities — and to specify size, style and growth assumptions.
This transparency can remove some of the undervaluation conglomerates may cope with, as a function of their extreme size and complex business segmentation.
When a company is looking to realize the value of a particular business segment, it can spin it off or sell it to an interested buyer. If a sale to a third-party buyer is the chosen route, that sale will produce a large, up front cash infusion to the parent company. This type of transaction is not necessarily desired, because it causes a massive taxable event, and the deal may not even go through due to government regulation.