Spin-off

The creation of a separate company from part of an existing firm. There could be several reasons for such a move - for example a strategy to dispose of non-core assets, or an attempt to unlock a division's value by giving it a more independent management structure and possibly attracting outside investment. Shareholders of the parent company would normally receive a proportionate number of shares in the new entity. If the parent company decides to sell only a minority stake in the business, the exercise is called a partial spin-off. A spin-off is also a company whose business is based on products or technology initially developed in a parent company, university or research institution.

Example
Plant Genetic System (PGS) was founded in 1983 by two professors at Ghent University (Belgium). Marc Van Montagu and Jeff Schell were among the first to assemble a practical system for genetic engineering of plants. That technology, which was developed within the university, served as the basis for the success of PGS. In 1985, PGS was the first company to develop genetically engineered tobacco plants with insect tolerance. Genomatix: Cutting a path through the data jungle The complete sequencing of the Adenovirus genome at the end of the 1980s heralded a rapid expansion in genomic research and the birth of bioinformatics. Professor Thomas Werner, who was working at the time at the Helmholtz Zentrum Mnchen, is a founding father of the discipline. He established one of the first research groups in this area, going on to found one of the first companies Genomatix Software GmbH. Today, the company offers software, databases, hardware and services that make a major contribution to the meaningful analysis and interpretation of the inconceivable amount of genomic data now being produced. One of the most important areas of future application will be personalized medicine, enabling therapies to be tailored to individual patients.

Origin: Helmholtz Zentrum Mnchen Genomatix was founded in 1997 as a spin-off of the Helmholtz Zentrum Mnchen, and started operations in 1999. Its products and services are used by over 35,000 researchers in industry and academia all over the world. The companys customers include the two biggest public and commercial establishments in the field: the National Center for Biotechnology Information (NCBI) in the USA and the pharmaceutical company Pfizer.

Definition of 'Split-Off'
A means of reorganizing an existing corporate structure in which the stock of a business division, subsidiary or newly affiliated company is transferred to the stockholders of the parent company in exchange for stock in the latter. Split-offs often occurs when the parent company wishes to draw a greater distinction between itself and the split-off business. A point in the restructuring of a company where the parent company will offer investors shares of a subsidiary in return for shares of the parent company. In a split-off, the parent company offers its shareholders the opportunity to exchange their ParentCo shares for new shares of a subsidiary (SplitCo). This tender offer often includes a premium to encourage existing ParentCo shareholders to accept the offer. For example, ParentCo might offer its shareholders $11.00 worth of SplitCo stock in exchange for $10.00 of ParentCo stock (a 10% premium). If the tender offer is oversubscribed, meaning that more ParentCo shares are tendered than SplitCo shares are offered, the exchange is conducted on a pro-rata basis. If the tender offer is undersubscribed, meaning that too few ParentCo shareholders accept the tender offer, ParentCo will usually distribute the remaining unsubscribed SplitCo shares pro-rata via a spin-off. A split-off is viewed as a sale for accounting purposes with a recognized gain or loss equal to the difference between the market price of the new SplitCo stock issued and ParentCo's inside basis in SplitCo's assets.

Because the split-off is tax-free, provided that it meets the requirements set forth by Section 355, there is no corresponding gain or loss recognized for tax purposes. The split-off is a tax-efficient way for ParentCo to redeem its shares. However, since split-offs require shareholders to tender their ParentCo shares to receive new shares of the subsidiary, they suffer from lower certainty of execution and are mechanically more complex relative to spin-offs. Another notable disadvantage of split-offs is the potential for shareholder lawsuits if the exchange ratio (premium) offered by ParentCo is deemed unfair by activist shareholders. On the other hand, shareholder churn may be lower for a split-off than for a spin-off because the subscription feature of a split-off better aligns shareholders' preferences with their equity holdings than does a pro rata spin-off. An equity carve-out is typically executed ahead of a split-off to establish a public market valuation for SubCo's stock. Although the split-off can be conducted without a preceding carve-out, execution is more challenging given the difficulty in measuring the appropriate premium without an established market value for SubCo. The preceding carve-out therefore all but eliminates the possibility of shareholder lawsuits related to the premium.