In the business world, a divestiture is a situation where a business asset is fully or partially disposed of, usually as a way for a company to manage its portfolio of assets. Divestitures are extremely common in conglomerates, as detailed below. In some instances, divestitures are undertaken for legal reasons, as regulations may deem a business unit as a monopoly or an anti-competitive entity. Sometimes, too, divestitures are undertaken because of changing tax structures that the parent business faces.
A corporate divestiture can involve the sale of the unit, an exchange, a closure or even a bankruptcy. The types of divestitures include carve-out, spin-off, split-off, joint ventures and trade sale. Here, we will focus on spin-off.
What Are Spin-Offs?
“Spin-off” is a common term, most commonly associated with television programs whose premise was established in the parent program. Similarly, a spin-off company is when a company creates a new business subsidiary from its parent company. The parent company separates part of its business (usually a unit or division) from itself by either selling the non-core assets to another party or creating an entirely new company depending on the market conditions. In most cases, the newly formed separate company retains the assets, employees, existing products and IP (intellectual property) that were part of the parent company. Famous spin-off companies include PayPal (from eBay), Phillip Morris (from Altria Group) and Kraft Foods (also from Altria Group).
The Reason for Spin-Off Divestitures
As mentioned, there are many reasons for a company to spin off a division. While in some cases it’s regulation- or tax-related, in others, the unit strays too far from the parent company’s core competencies, a common issue for conglomerates. Other reasons for spin-off divestiture are numerous; these include non-performance, or redundancy (after a merger or acquisition).
Divestiture vs Spin-Off
While both divestitures and spin-offs are strategies companies use to streamline operations and focus on their core businesses, they differ significantly in their execution and impact on the company structure. Here’s a concise comparison
Divestiture
It involves a company selling, liquidating, or otherwise disposing of a business unit or asset. This process can result in the outright sale to another company or the shutdown of the unit if it’s not profitable or no longer aligns with the company’s strategic goals.
Spin-Off
It is a form of corporate divestiture where a business creates a new, independent company from an existing business unit or division. Shares of the new company are distributed to the existing shareholder. The spin-off operates as a separate entity, with its management and board of directors.
7 Benefits of Spin-Off Divestitures
Divestiture allows a company to reduce costs, eliminate redundancy, focus on its core business or even repay debts. In most instances, it’s a way to increase shareholder value. In the big picture, spin-offs generally increase returns for shareholders, mainly because the newly independent company can better focus on its specific products and/or services.
- Reduce Costs
- Eliminate Redundancy
- Focus on Core Business
- Repay Debts
- Increase Shareholder Value
- Helps Increase Organizational Efficiency and Streamline Operations
- Reduce Employment Risk
In most instances, both the parent company and the newly-formed spin-off company fare better financially after the spin-off.
Spin-Off Security Risks
Similarly, there are some risks associated with spin-off divestitures. These include:
- Negative Impact on Cost Structure/Costs No Longer Shared
- Outstanding Contractual Obligations
- Sudden Fluctuation in Cash Flow
When dealing with a spin-off divestiture, another risk to pay attention to is that access rights and identity formation. This involves untangling systems that are common to both companies – account, procurement, HR and other technology. Once that’s accomplished, new rights have to be granted to new hires; likewise, access rights of existing employees not involved in the new (or parent) company need to be revoked. Having access to a virtual data room (more on that below) will help all parties involved in both companies to accomplish that task.
Virtual Data Rooms for Spin-Off Companies
One of the necessary tools for any type of divestiture your company is planning on is a virtual data room (VDR). A VDR is a necessary tool in every type of divestiture transaction. It is a secure, online location where all the parties involved in the deal can safely and securely store and share the required documentation. A sophisticated VDR includes secure access controls, which include enterprise-level encryption, multiple layers of security and customizable rights management, allowing only sanctioned parties to access (or edit) certain documents. Using a VDR for your transaction will expedite the process as well as save on the costs of completing the transaction.
The CapLinked Solution
CapLinked, an industry leader in the VDR space, provides secure virtual rooms for all types of business transactions, including divestitures and spin-offs. Its user-friendly interface is compatible with virtually every OS, which gives users the ability to upload, access and download documents from any type of computer, smartphone or tablet. To learn more about virtual data rooms and enterprise document management, start a free 14-day trial.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Sources
Ask Any Difference – Difference Between Spin-Off and Divestiture (With Table)
Deloitte – 2022 Global Divestiture Survey
Investopedia – Spin-Off vs. Split-Off vs. Carve-Out: What’s the difference?
