Spin Out

A spin out is a type of corporate realignment involving the separation of unit(s) or division(s) to form a new independent corporation. The spin out company takes with it the operations of the segment and associated assets and liabilities. The parent company is required by the SEC to detail the spin out in Form 10-12B, which contains a substantial information letter or narrative that outlines the rationale for the spin out, strengths and weaknesses of the new company, and the outlook of its industry. A spin out, tax-free to shareholders, can take up to six months to complete.

The main rationale for a spin out is two-fold. First, it is a way to unlock the value of an embedded division, which might be traveling a different growth arc than the overall company. Usually, this 'trapped' or constrained segment is growing faster than its parent and would be better off as an independent company. Second, the spin out allows the parent company to focus on its core operations without the diversion of resources to a segment that could have different needs in various aspects - operations management, marketing, finance and human resources. Parent companies often provide support for their spin outs by retaining equity in them or signing contractual relationships for the supply of products or services. In many cases, the management team of the spin out firm is drawn from the parent company as well.

Investors are generally in favor of a spin out, as it makes business sense for a segment that has different needs and growth prospects to go it alone. The sum of the separated parts is usually greater than the whole for investors, as valuations over time have demonstrated. However, the spin out process can be costly in terms of management time and distraction for a number of months. Management's focus may shift from running the company to executing the spin out. Also, there can be significant transaction expenses to plan and complete a spin out.

Spin outs are common. Investors have good reason to push for them. Chipotle Mexican Grill was spun out of McDonald's in 2006, Mead Johnson Nutrition was spun out of Bristol Myers Squibb in 2009, Zoetis was spun out of Pfizer in 2013, and Ferrari was spun out of Fiat Chrysler in 2016. So far, investors have been amply rewarded in all these cases. Another high-profile spin out closed in December 2017. Delphi Automotive PLC spun out Delphi Technologies PLC, the fast growing company whose mission is to capitalize on the opportunity offered by "the convergence of automated driving, increased electrification and connected infotainment, all enabled by exponential increases in computing power and smart vehicle architecture," according to the CEO. Delphi Automotive (now named Aptiv PLC) retains the powertrain business, the larger but slower-growing business. Now spun out, Delphi Technologies PLC is in charge of its own destiny.