Spin-off
M&A / Merger ModelA separation in which the parent distributes shares in a division to its own shareholders pro rata, receiving no cash.
Also written: spin off, spinoff, demerger
In a spin-off the parent hands shares in a separated business to its existing shareholders in proportion to what they already hold. Nobody buys anything, so no cash reaches the parent. A holder of one parent share ends up holding that share plus a share in the new company. In UK practice the same transaction is normally called a demerger.
That is the whole difference from a divestiture. A sale converts a business into cash and gives it a new owner. A spin-off converts it into a separately quoted share and gives it to the people who already owned it. The common error is saying a spin-off raises money to repay debt: it raises nothing, because there is no buyer.
The honest qualification is that parents frequently do extract cash first, by putting debt into the business being separated and paying themselves a dividend before it leaves. That is a financing step layered on top of the separation rather than proceeds from it.
A spin-off gets chosen when no buyer will pay full value, either because none has synergies or because the business is too large to be bought, when a trade sale to the obvious buyer would not clear competition review, when the tax cost of a sale is heavy relative to a qualifying distribution, or when the board believes two separately quoted companies with their own boards and their own investor bases will be rated better than one. The conditions for tax neutral treatment differ by jurisdiction and by structure, so treat that as a question for tax counsel rather than a single rule.
Separation does not end at the legal split. The two companies frequently remain entangled for a period through a transitional services agreement, retained cross holdings and the allocation of debt and pension obligations between them.
Worked example
A group with two divisions distributes one of them to its shareholders. Illustrative.
Before: an investor holds one share in a company containing both businesses. After: the same investor holds one share in each of two companies.
The investor's economic position is unchanged on day one and the parent has received nothing. What has changed is that each business now has its own quoted price, its own board and its own currency for future deals.