Why do companies often engage in spin-offs?

For Woxa, our platform does not provide Spin-off services. But we would like to present information about Spin-off in order to share knowledge about Corporate Actions.  

Why do companies often engage in spin-offs?

Spin-off is another type of corporate actions in which the parent company separates its own affiliated company (subsidiaries) to give them the freedom to manage their own business. Because the parent company sees the potential and growth of that company enough.

Why is there a spin-off?

This is because the parent company wants to find a source of capital by separating out its affiliated company and doing an IPO (Initial Public Offering).

Benefits of Spin-off

1. Affiliated companies help reduce the financial burden of the parent company. This is because the parent company has to bear the burden of funding to support its affiliates.
2. Affiliated companies separate themselves and enter the stock exchange and can raise funds through an IPO.
3. Affiliated companies can manage themselves independently, such as standardizing management for transparency and efficiency and a good image from the perspective of investors.
4. Affiliated companies can raise their own funds in many ways and can grow their business in the future.
5. The parent company has increased share value. This is because the separated subsidiaries have share prices on the stock exchange.
6. After the spin-off of the subsidiary company came out. The parent company can still hold up to 70% of the company's shares.
7. Shareholders have more investment options. Previously, if anyone was interested in a subsidiary company, they had to invest in shares of the parent company as well. But after the spin off, investors can invest in affiliate companies immediately.

Things to consider about spin-off.

1. Conflict of interest = Affiliated companies must have different business characteristics from the parent company in order to reduce trade barriers against each other.
2. Management system = The management system must be clearly separated from each other, such as executives, personnel, management policies in various areas.
3. Maintaining the status of the parent company = The parent company must maintain its status in accordance with the stock exchange's criteria.
4. Rights of shareholders of the parent company = Because affiliated companies that are about to be separated or spin off must increase capital in order to make an IPO on the stock exchange. As a result, the value of the shares held by shareholders will decrease (Dilution Effect). Therefore, the right to subscribe for shares must be given to the existing shareholders first (Pre-emptive right).

For Example:

• Oct 2, 2023. The Kellogg Company has separated into 2 companies with reasons. To focus efforts and add value to shareholders

1. Kellanova (K.N). - Global snack business
2. WK Kellogg Co (KLG.N). - Cereal business in North America.

summarize

Spin-off is when the parent company gives its affiliates Separated to operate independently, able to manage assets and various policies on its own, including conducting an IPO, which can allow affiliates to find their own funding sources and reduce the burden on the parent company to carry the company's capital. Affiliated

Spin-off has many benefits and considerations. But companies like to do spin-offs because they get 70% of shares in affiliated companies and can increase the value of the parent company's shares even more.