Investing Assets & Markets Stocks What Is a Spinoff? By Paul Nolan Updated on December 18, 2021 Reviewed by Akhilesh Ganti In This Article View All In This Article Definition and Example of a Spinoff How a Spinoff Works Pros and Cons of a Spinoff What It Means for Individual Investors Photo: Cavan Images / Getty Images Definition A spinoff occurs when a larger company turns a subsidiary into a separate, independent company by issuing shares of stock in the newly formed company. Shareholders of the parent company then receive shares of the newly formed spinoff company on a proportional basis. Key Takeaways A spinoff is when a larger company turns a subsidiary into a separate, independent business by issuing shares of stock in the newly formed company; shareholders then receive the shares on a proportional basis.A company may choose to spin off a subsidiary for many reasons, with the most common being that the holding company believes the process will add value for either the parent company, the spinoff company, or both.Research suggests that spinoffs lead to greater performance for both the parent company and the newly created company; however, there is no guarantee of success. A notable example of a spinoff from recent years is the 2015 spinoff of PayPal from its parent company eBay Inc., which is deemed a success because PayPal’s market cap is more than six times that of eBay Inc., as of October 2021. Definition and Example of a Spinoff In a spinoff, a parent company chooses to distribute shares of a subsidiary to the original company’s shareholders, creating a separate, independent company. The new company then gains a new name and new leadership, but remains owned by the holding company. A company may spin off a subsidiary into a separate company if it believes the process will create more value for either the parent company, the spinoff company, or both. In some cases, company executives, board members, or major shareholders may recommend a spinoff if they feel the subsidiary is not a good fit under the parent company’s guidance, and could thrive as a separate company with independent leadership. Note In the case of a larger parent company, a spinoff may be initiated to allow management teams at the separate companies to focus on their distinct core businesses, leading to superior performance for both. Another common example for when a company may initiate a spinoff is if the parent company had tried to sell the division of the business, but it failed. A spinoff would allow the company to reorganize the structure of the subsidiary, and perhaps enhance its performance. A notable example from recent years is the 2015 spinoff of PayPal from its parent company eBay Inc. In this scenario, eBay Inc. stockholders received one share of PayPal common stock for each share of eBay Inc. common stock as held at the close of business on July 8, 2015—the record date for the distribution of PayPal shares. EBay initially acquired PayPal in 2002 in what was then viewed as a synergistic match of two businesses—one as an online auction company and the other as an online payments company. Over time, as the markets changed and PayPal grew in popularity, eBay decided to pursue a spinoff. In a message to eBay investors when the spinoff was near, John Donahoe, who was then the CEO and president of eBay, stated, “Going forward, eBay and PayPal will each have a sharper focus and greater flexibility to pursue future success in their respective markets.” PayPal was growing faster than its parent company at the time of the spinoff, and continued to do so in the years that followed. As of Oct. 5, 2021, PayPal’s market capitalization was $307.5 billion, while eBay’s market cap was $45.8 billion. How a Spinoff Works State law and rules of the stock exchanges determine if a company must seek shareholder approval for a spinoff. There also are many regulatory and legal issues that may come with a spinoff depending on multiple factors. A subsidiary must register a spinoff of shares under the Securities Act if the spinoff is a “sale” of the securities by the parent. The U.S. Securities and Exchange Commission (SEC) states the spinoff does not have to register under the Securities Act if the following conditions are met: The parent shareholders do not provide consideration for the spinoff shares.The spinoff is pro rata to the parent shareholders.The holding company provides adequate information about the spinoff and the subsidiary to its shareholders and to the trading markets.The parent company has a valid business purpose for the spinoff.If the parent company spins off “restricted securities,” it has held those securities for at least two years. Note Once a spinoff company begins trading on a stock exchange, the parent company's share price typically drops to reflect the fact that its valuation no longer includes the spinoff unit. This should not negatively affect existing shareholders, however, as the difference in price is reflected in the new shares of the spinoff company they received. Pros and Cons of a Spinoff Pros Increased focus from management Reduced risk or debt Reduced overhead Potential for growth or performance improvement Cons High costs for the parent company Employee discomfort Loss of identity Pros Explained Increased focus from management: A spinoff often gives the parent company and the new company the chance to start anew. It can enable the leadership teams of both the businesses to hone in on their resources and create more narrowly focused strategies. Reduced risk or debt: While under the holding company, a subsidiary may require significant investment in research, development, marketing, and other expense areas. Separating it from the parent company can isolate the costs or risks of the new spinoff company. Conversely, a parent company may have extensive debt that is dragging down the performance of a division. Initiating a spinoff can isolate the debt to the parent company and not affect the spinoff company’s balance sheet. Reduced overhead: Following a spinoff, the parent company is no longer responsible for agency costs or other expenses the spinoff company incurs. It is completely its own entity, which may give both companies more financial freedom. Potential growth or performance improvement: According to August 2021 research from Barclays, nearly 60% of spinoff companies traded at a multiple greater than their parent companies post-transaction, and about half had margins exceeding those of their parent companies. Cons Explained Costs to the parent company: Costs related to a spinoff may include legal fees, taxes, functional costs related to the separation, and potential employee-related costs such as relocation. Employee discomfort: When a spinoff occurs, many employees of the parent company may either be transferred to the new company, or potentially let go. When a spinoff is taking place, employees may have anxiety or feel pushed out, ultimately changing the atmosphere of the workspace. Loss of identity: A spinoff can leave the newly created company struggling to establish a corporate identity. However, escaping a corporate identity can be part of the intent of a spinoff, as it was when Google created a new parent company, Alphabet. The company created a new parent company identity because it had grown to include divisions well beyond the search engine function its original name had become synonymous with. What It Means for Individual Investors Long-term studies of how spinoffs affect stock performance indicate that shares of both the parent company and the spinoff company outperform benchmarks, at least for a year or more. Of course, there is no guarantee that either a parent company or a spinoff company will fare well. As with any investment decision, it is important to analyze how a spinoff may impact both the parent company and the newly created company, and determine what fits your investment strategy. It may lead to a decision to allocate your money into one or the other company, hold on to shares of both, or divest your shares in the entities. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. eBay. "eBay Inc. Board Approves Completion of eBay and PayPal Separation." Accessed Oct. 5, 2021. SEC. "EBay To Acquire PayPal." Accessed Oct. 5, 2021. eBay. "John Donahoe on the Next Chapter for eBay and PayPal." Accessed Oct. 5, 2021. Yahoo Finance. "PayPal Holdings, Inc. (PYPL)." Accessed Oct. 5, 2021. Yahoo Finance. "eBay Inc. (EBAY)." Accessed Oct. 5, 2021. SEC, Division of Corporation Finance Securities and Exchange Commission. "Staff Legal Bulletin No. 4 (CF)." Accessed Oct. 5, 2021. Barclays. "Shrinking to Grow: Creating Value Through Spin-Offs." Accessed Oct. 5, 2021. SEC. "Schedule 14A, Alphabet, Inc." Accessed Oct. 5, 2021. Purdue University Krannert School of Management. "The Stock Price Performanceof Spin-Off Subsidiaries, Their Parents, and the Spin-Off ETF, 2001–2013." Accessed Oct. 5, 2021.