FREE online courses on Financial Management and Creating Value - Chapter 1 - Spin Offs

 

One final type of restructuring that deserves some attention is the spin off. A spin off is the creation of a new separate company from an existing company. The shareholders own the same collection of assets, but they now have two shares of stock for two companies. Since there is no real change in assets, you would expect no real change in values. However, when the pie is divided into smaller pieces, the value of the pie seems to increase. Spin offs seem to release value that is buried inside a large organization and when each company can manage on its own, value is increased. When AT&T decided to spin off Lucent Technologies, one investor remarked: "the dog can finally run." Spin offs can be a good way of releasing value that is being held back by large bureaucratic companies.