Spinoff

A spinoff happens when a company separates one of its divisions or subsidiaries into a new, independent company and distributes shares of that new company directly to its existing shareholders, typically on a pro rata basis. No new capital is raised in the process, and shareholders end up owning stock in two separate companies where they previously owned stock in just one.

Companies pursue spinoffs to let the market value each business on its own terms, especially when a division has a meaningfully different growth rate, margin profile, or investor base than the rest of the company. A unit growing much faster than the rest of the business can end up trading at a lower valuation multiple than it would earn as an independent company simply because it is buried inside a business that overall grows more slowly, and separating it can unlock value for both sides once each is valued more cleanly on its own merits.

A spinoff differs from a carve-out, where the parent sells a minority stake in the subsidiary through an IPO and raises cash while keeping majority control, and from a split-off, where shareholders must actively choose to exchange parent shares for shares in the new company rather than simply receiving them. Because spun-off shares are handed out automatically, some of the new company's initial shareholders may not have wanted that particular stock and sell it soon after the spinoff, which can create selling pressure in the new stock's early days that has nothing to do with its actual prospects.