Corporate Spin-off Information
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.[1]
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:
- investing equity 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.
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U.S. SEC definition
The United States Securities and Exchange Commission 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.
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[2] 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:
- Guidant was spun out of Eli Lilly and Company in 1994, formed from Lilly's Medical Devices and Diagnostics Division.
- Agilent Technologies spun out of Hewlett-Packard in 1999, formed from HP's former test-and-measurement equipment division.
- Cenovus Energy was spun out of Encana Corporation in 2009.
- Ocean Rig UDW Inc was spun out of Dryships Inc 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 Oxford research, and have been "spun out" by Isis Innovation, the technology transfer arm of the University.
Examples following the second definition of spin-out:
- Shugart Associates was a spin-out of IBM.
- Fairchild Semiconductor was a spin-out of Shockley Transistor. (These founders were the "Traitorous Eight". Intel was a spin-out of Fairchild, as were a large number of firms in the semiconductor industry.)
- AOL was a spin-out of Time Warner.
Mirror company formation
Mirror company formation is a specialised form of spin-out used to create a new public company. 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.
Notes
- ^ "Starbursting". Economist. Mar 24th 2011. http://www.economist.com/node/18440915?story_id=18440915. Retrieved 18 April 2011.
- ^ (1999), “Spin-outs: Knowledge Diffusion through Employee Mobility” Federal Reserve Bank of Minneapolis working paper, forthcoming in RAND Journal of Economics
See also
References
- EIRMA (2003) Innovation Through Spinning In and Out Research Technology Management, Vol. 46, 63-64.
- Richards, G. (2009). Spin-Outs: Creating Businesses from University Intellectual Property. Harriman House. ISBN 978-1905641-98-7
- Rohrbeck, R., Döhler M. and H. M. Arnold (2009): "Creating growth with externalization of R&D results - the spin-along approach" Global Business and Organizational Excellence, 28, 44-51.
- Rohrbeck, R., Hölzle K. and H.G. Gemünden (2009): "Opening up for competitive advantage - How Deutsche Telekom creates an open innovation ecosystem" R&D Management, Vol. 39, S. 420-430.
- Zahra, S.A. (1996) Governance, ownership, and corporate entrepreneurship: The moderating impact of industry technological opportunities, Academy of Management Journal, Vol. 39, 1713-1735.
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 House: UK University Spin-out Companies [1]
- PhD theses on corporate spin-offs
- Allocation of Tax Basis after Spinoffs
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