Glossary
Spinoff
When a company separates a division into a new independent public company and hands the new shares to its own shareholders.
On this page
A spinoff is the creation of a new, independent public company from a part of an existing one, with the new company's shares distributed to the parent's shareholders. After the split, investors who owned the parent own two separate stocks. Companies do it to give a business its own management, capital and valuation, and investors pay attention because the pieces sometimes trade very differently from the combined whole.
How it works
The parent sets a distribution ratio and a record date. Shareholders of record receive new shares in proportion to their holdings, usually without paying anything, and the parent's share price drops by roughly the value of what was distributed on the ex-distribution date. In the US, a spinoff that meets the requirements of the tax code is generally tax-free to shareholders; your original cost basis is then divided between the two holdings in proportion to their market values, using figures the parent publishes.
Things to watch for
Spinoffs often see heavy selling in their first weeks as index funds and fund managers who cannot or will not hold the smaller company unload it. The new company may also carry a large share of the parent's debt. A carve-out is different: the parent sells part of the subsidiary to the public in an IPO for cash instead of handing shares to its own holders.