Spin out
Encyclopedia
A spin-out, also known as a spin-off or a starburst, refers to a type of corporate action
where a company "splits off" sections of itself as a separate business.
The common definition of spin-out is when a division of a company or organization becomes an independent business. The "spin-out" company takes assets, intellectual property
, technology
, and/or existing products from the parent organization. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks; thus, as the moment of spin-off, the ownership of the original and spun-off companies are identical. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest in only the portion of the business they think will have the most growth.
Many times the management
team of the new company are from the same parent organization. Often, a spin-out offers the opportunity for a division to be backed by the company but not be affected by the parent company's image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment.
In most cases, the parent company or organization offers support doing one or more of the following:
All the support from the parent company is provided with the explicit purpose of helping the spin-out grow.
definition of "spin out" is more precise. Spin-outs occur when the equity owners of the parent company receive equity stakes in the newly spun out company. For example, when Agilent Technologies
was spun out of Hewlett-Packard
in 1999, the stock holders of HP received stock in Agilent.
A company "spun out" in the common view but not considered a spin-out in the SEC's eyes would be considered by the SEC as a technology transfer or licensing of the technology to the new company.
Spin-outs are important sources of technological diffusion in high technology industries.
Franco and Filson examine spin-outs as a source of technological diffusion in rapidly evolving high technology industries. Their analysis suggests that, other things equal, research-oriented employees accept lower wages at firms with better technological know-how in exchange for the implicit opportunity to learn about their employer's technology and capabilities. Employees who successfully learn can leave their employer and start their own firms using some of their former employer's know-how. As this opportunity has high future value, employees are willing to accept lower wages today in return for the chance to "spin out" tomorrow.
Franco and Filson's analysis suggests that spin-outs play critical roles in the evolution of the industry. More technologically advanced firms are more likely to survive and more likely to generate spin-outs, and spin-outs that emerge from more advanced firms are more likely to survive, as long as the spin-outs succeed in learning their parents' know-how. The fact that spin-outs are important in the evolution of high technology industries during the initial take-off stage challenges the previous conventional wisdom that progress and entry early on in the evolution of an industry is driven by forces outside the industry itself.
Example of companies created by technology transfer or licensing, a "spin-out" in the common point of view:
Examples following the second definition of spin-out:
. It simplifies the process of listing the shares on a public stock exchange
.
It works by an existing public company issuing a bonus share
at a rate of 1 for 1 in the new company. This new company is then sold to another company that does not want to go through the complex and expensive process of issuing a prospectus
. The company that purchases the 'shell' then does a reverse takeover
, to transfer an operating business into the new company. This is often called a "backdoor listing".
The advantages are the original company sells a shell for much more than it cost to create and the shareholders of the public company receive shares in a new operating business. For the operating company it is much faster and possibly also cheaper than the normal requirements of complying with the listing requirements of most exchanges.
The London Stock Exchange
Alternative Investment Market
is considered the best market for new ventures as the market is large and has many international companies listed. Also, the time and effort required to achieve a listing is much shorter than many other markets. It typically costs at least USD 1 million to form a public company and list on a stock exchange.
In the United States, a mirror company may be formed tax-free by complying with the requirements of Internal Revenue Code section 355
.
Corporate action
A corporate action is an event initiated by a public company that affects the securities issued by the company. Some corporate actions such as a dividend or coupon payment may have a direct financial impact on the shareholders or bondholders; another example is a call of a debt security...
where a company "splits off" sections of itself as a separate business.
The common definition of spin-out is when a division of a company or organization becomes an independent business. The "spin-out" company takes assets, intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
, technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
, and/or existing products from the parent organization. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks; thus, as the moment of spin-off, the ownership of the original and spun-off companies are identical. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest in only the portion of the business they think will have the most growth.
Many times the management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
team of the new company are from the same parent organization. Often, a spin-out offers the opportunity for a division to be backed by the company but not be affected by the parent company's image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment.
In most cases, the parent company or organization offers support doing one or more of the following:
- investing equityOwnership equityIn accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
in the new firm, - being the first customer of the spin-out (helps to create cash flow),
- providing incubation space (desk, chairs, phones, internet access, etc.) or
- providing services such as legal, finance, technology, etc.
All the support from the parent company is provided with the explicit purpose of helping the spin-out grow.
U.S. SEC definition
The United States Securities and Exchange CommissionUnited States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...
definition of "spin out" is more precise. Spin-outs occur when the equity owners of the parent company receive equity stakes in the newly spun out company. For example, when Agilent Technologies
Agilent Technologies
Agilent Technologies , or Agilent, is a company that designs and manufactures electronic and bio-analytical measurement instruments and equipment for measurement and evaluation...
was spun out of Hewlett-Packard
Hewlett-Packard
Hewlett-Packard Company or HP is an American multinational information technology corporation headquartered in Palo Alto, California, USA that provides products, technologies, softwares, solutions and services to consumers, small- and medium-sized businesses and large enterprises, including...
in 1999, the stock holders of HP received stock in Agilent.
A company "spun out" in the common view but not considered a spin-out in the SEC's eyes would be considered by the SEC as a technology transfer or licensing of the technology to the new company.
Other definitions
A second definition of a spin-out is a firm formed when an employee or group of employees leaves an existing entity to form an independent start-up firm. The parent entity can be a firm, a university, or another organization. Spin-outs typically operate at arm's length from their parent organizations and have independent sources of financing, products, services, customers, and so on. In some cases, the spin-out may license technology from the parent or supply the parent with products or services.Spin-outs are important sources of technological diffusion in high technology industries.
Franco and Filson examine spin-outs as a source of technological diffusion in rapidly evolving high technology industries. Their analysis suggests that, other things equal, research-oriented employees accept lower wages at firms with better technological know-how in exchange for the implicit opportunity to learn about their employer's technology and capabilities. Employees who successfully learn can leave their employer and start their own firms using some of their former employer's know-how. As this opportunity has high future value, employees are willing to accept lower wages today in return for the chance to "spin out" tomorrow.
Franco and Filson's analysis suggests that spin-outs play critical roles in the evolution of the industry. More technologically advanced firms are more likely to survive and more likely to generate spin-outs, and spin-outs that emerge from more advanced firms are more likely to survive, as long as the spin-outs succeed in learning their parents' know-how. The fact that spin-outs are important in the evolution of high technology industries during the initial take-off stage challenges the previous conventional wisdom that progress and entry early on in the evolution of an industry is driven by forces outside the industry itself.
Spin-out example
Some examples of spin-outs in SEC eyes:- GuidantGuidantGuidant Corporation, part of Boston Scientific and Abbott Labs, designs and manufactures artificial pacemakers, implantable defibrillators, stents, and other cardiovascular medical products. Their company headquarters is located in Indianapolis, Indiana. Their main competitors are Medtronic, St...
was spun out of Eli Lilly and CompanyEli Lilly and CompanyEli Lilly and Company is a global pharmaceutical company. Eli Lilly's global headquarters is located in Indianapolis, Indiana, in the United States...
in 1994, formed from Lilly's Medical Devices and Diagnostics Division. - Agilent TechnologiesAgilent TechnologiesAgilent Technologies , or Agilent, is a company that designs and manufactures electronic and bio-analytical measurement instruments and equipment for measurement and evaluation...
spun out of Hewlett-PackardHewlett-PackardHewlett-Packard Company or HP is an American multinational information technology corporation headquartered in Palo Alto, California, USA that provides products, technologies, softwares, solutions and services to consumers, small- and medium-sized businesses and large enterprises, including...
in 1999, formed from HP's former test-and-measurement equipment division. - Cenovus EnergyCenovus EnergyCenovus Energy is an integrated oil company headquartered in Calgary, Alberta.Cenovus was formed on December 1, 2009 when Encana Corporation split into two distinct companies: one an integrated oil company , the other a pure play natural gas company . The split left Cenovus with the assets formerly...
was spun out of Encana CorporationEnCana CorporationEncana Corporation is one of North America's largest natural gas producers, with about 95 percent of its production being natural gas. Its strategy is to be the lowest-cost, highest-growth senior natural gas producer in North America. The company produced approximately of natural gas in 2010.The...
in 2009. - Ocean Rig UDW Inc was spun out of Dryships IncDryShips IncDryShips Inc is a dry bulk shipping company based in Athens, Greece. As of April 2011 the company owned 35 drybulk carriers, consisting of 7 Capesize, 26 Panamax and 2 Supramax vessels...
in September, 2011.
Example of companies created by technology transfer or licensing, a "spin-out" in the common point of view:
- Oxford NanoLabs and Oxford RF Sensors were set up to commercialize technology based on University of OxfordUniversity of OxfordThe University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...
research, and have been "spun out" by Isis InnovationIsis InnovationIsis Innovation Ltd is a British technology transfer company, wholly owned by the University of Oxford, located in Summertown, Oxford, England.- Overview :...
, the technology transfer arm of the University.
Examples following the second definition of spin-out:
- Shugart AssociatesShugart AssociatesShugart Associates was a computer peripheral manufacturer that dominated the floppy disk drive market in the late 1970s and is famous for introducing the 5¼-inch minifloppy disk drive....
was a spin-out of IBMIBMInternational Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...
. - Fairchild SemiconductorFairchild SemiconductorFairchild Semiconductor International, Inc. is an American semiconductor company based in San Jose, California. Founded in 1957, it was a pioneer in transistor and integrated circuit manufacturing...
was a spin-out of Shockley Transistor. (These founders were the "Traitorous EightTraitorous EightThe Traitorous Eight, as they became known, are eight men who left Shockley Semiconductor Laboratory to form Fairchild Semiconductor in 1957. More neutral terms include the "Fairchild Eight" and the "Shockley Eight." They have sometimes been called "Fairchildren," although this term has been also...
". Intel was a spin-out of Fairchild, as were a large number of firms in the semiconductor industry.) - AOLAOLAOL Inc. is an American global Internet services and media company. AOL is headquartered at 770 Broadway in New York. Founded in 1983 as Control Video Corporation, it has franchised its services to companies in several nations around the world or set up international versions of its services...
was a spin-out of Time WarnerTime WarnerTime Warner is one of the world's largest media companies, headquartered in the Time Warner Center in New York City. Formerly two separate companies, Warner Communications, Inc...
.
Mirror company formation
Mirror company formation is a specialised form of spin-out used to create a new public companyPublic company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
. It simplifies the process of listing the shares on a public stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
.
It works by an existing public company issuing a bonus share
Bonus share
A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company...
at a rate of 1 for 1 in the new company. This new company is then sold to another company that does not want to go through the complex and expensive process of issuing a prospectus
Prospectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
. The company that purchases the 'shell' then does a reverse takeover
Reverse takeover
A reverse takeover or reverse merger is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public...
, to transfer an operating business into the new company. This is often called a "backdoor listing".
The advantages are the original company sells a shell for much more than it cost to create and the shareholders of the public company receive shares in a new operating business. For the operating company it is much faster and possibly also cheaper than the normal requirements of complying with the listing requirements of most exchanges.
The London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
Alternative Investment Market
Alternative Investment Market
AIM is a sub-market of the London Stock Exchange, allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market....
is considered the best market for new ventures as the market is large and has many international companies listed. Also, the time and effort required to achieve a listing is much shorter than many other markets. It typically costs at least USD 1 million to form a public company and list on a stock exchange.
In the United States, a mirror company may be formed tax-free by complying with the requirements of Internal Revenue Code section 355
Internal Revenue Code section 355
Section 355 of the Internal Revenue Code allows a corporation to make a tax-free distribution to its shareholders of stock and securities in one or more controlled subsidiaries. If a set of statutory and judicial requirements are met, neither the distributing corporation nor its shareholders...
.
Further reading
- Graham Richards (2009). Spin-Outs: Creating Businesses from University Intellectual Property. Harriman House. ISBN 978-1905641-98-7
External links
- Isis Innovation at University of Oxford
- Library HouseLibrary HouseThe Library House Ltd was a business information and consulting company based in Cambridge, England, founded in 2002 by Doug Richard and John Snyder....
: UK University Spin-out Companies http://www.libraryhouse.net/publications/downloads/MTSO_report_Mar2007.pdf - PhD theses on corporate spin-offs
- Allocation of Tax Basis after Spinoffs