Spinoff and IPO are two different share market terms. Companies try both the methods to gain more in stocks.
Spin-Off vs IPO
The main difference between spinoff and IPO is that in a spinoff, a new company is created under the parent company. On the other hand, in an IPO, a private company to gain more shares goes public for the first time.
A spinoff involves a company taking part in its shares, thereby breaking them into separate entities. The shares of the new company are distributed in the spinoff to the shareholders of the parent company. The benefits include the distribution is tax-free. The shares are distributed based on a pro-rata.
Initial Public Offerings(IPO) is a process when a private company goes public for the first time by selling their shares to the general public. IPOs is a way used by many companies to raise capital.
Comparison Table Between Spin-Off and IPO (in Tabular Form)
| Parameter of Comparison | Spinoff | IPO |
|---|---|---|
| Definition | A spin-off is the process when a public parent company organizes a subsidiary and distributes shares to current shareholders, thereby creating a new public traded company. | Sometimes a private company first sells stock to the public and raises its capital. when this occurs, an IPO occurs. |
| Company status | It is a division of public companies from parent public companies. | A private company transforms into a public company for gaining large volumes of shares. |
| Capital raised | There is no capital raise in spin-off. The shares are only sub divided. | New capital is raised for subsidiary |
| Disclosure | Information statement with 3 years financial, subject to the availability. | Prospectus, with 3 year financial. |
| Timings | The time required is 8-12 months. | The time required is 3-4 months. |
What is Spin-Off?
Spin-offs are divisions of companies or organizations. They become independent businesses with assets, employee, technologies taken from the parent company.
Spinoffs are a type of corporate restructuring. The stock of the spinoff in the form of dividend is distributed among its shareholders. This is free from all types of taxes.
What is the main cause of spinoffs? It is because the companies who are seeking buyers for themselves failed to receive better offers from the other firms.
Even if a single or group of employees leaves the existing entity. spinoffs will occur.
Keys for a successful Spin-off:
- Clarify the value-creation logic: This is the first step that concerns the fundamental strategic decision of whether to form a spin=off or not.
- Understand the true scope of the effort. Successful executing a spin-off has high risks with multiple stakeholders and unique challenges.
- Plan for the long term and not just for the launch. It is not a one day process the future consequences should be measured.
- Focus on people, not just the process. A successful spin-off considers not only the process but also the people.
Unlike other trade sales and IPOs, spin-offs distribute new entitiesto the company’s existing shares. This is the reason many companies find spin-offs attractive. Companies use spin-off processes for several reasons. It is expected that the larger business groups are less worthy compared to the spinoff entities.
What is IPO?
The IPO systematically demonstrates how a private corporation can offer its shares to the public while issuing a new stock.By using IPO process companies can have a raise in their capital from many public investors.
After application of an IPO, the shares of the company have the eligibility to be traded in the open market. The investors now sell these shares through secondary trading.
Main methods to have a successful IPO are:
- Stay committed to the shares and the parent Company. Several companies use IPOs in their financial management. This includes repaying their debts as well as in investing in the growth of business, there-by engaging in along term commitment.
- A perfect price to attract investors. The prime objective of IPO is Setting a low offer price in attracting the buyers keeping it high for maximizing the value of the IPO for the long run.
- How can you make an IPO successful? It is easy. It will gain success when the growth prospects of the new entity and sentiments of the market are showing growth.
- Enlarging and diversifying equity base. Enabling cheaper access to capital.
Through IPOs, private companies can gain access to significant capital that is available in the public market. The liquidity would be listed on an exchange.
You will find several private companies working with investment banks. They provide effective financial management. Moreover, these banks guide the firms through the IPO processes.
Main Differences Between Spin-Off and IPO
- Spin-off are subsidiary public companies of parent public companies. While IPO are private companies that went public for the first time.
- There is no taxation for spin-off as it is part of the parent company. But in IPO the new shares are not tax free at it is now public.
- Spin-off helps for new start-ups or divides the shares of large companies into smaller part. But IPOs are done to raise capital or gain more shares.
- Spin-off are long term process as it creates new companies from bigger companies. IPOs are short term process because these are private companies who sell to the public.
- Spin-off process used by large companies who wants its shares to be divided among smaller companies to achieve better. Where as, IPO process used by small private companies to gain more shares and raise a capital or help to complete their debts.
Conclusion
Both Spin-off and IPO are share market terms used by different companies to gain shares. The spin-off is a division of large companies to sub-companies to achieve more shares. Only public companies come under spinoffs.
While the IPO process is used by private companies when it’s time for them to go public. This helps them to raise funds and get capital for the long term. In the end, it all depends on the stocks and shares how these processes can be useful.
References
- https://www.sciencedirect.com/science/article/pii/S0166497205000441
- https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1195&context=soa_research