Reaping the financial and strategic benefits of a divestiture by spin-off

Abstract

Because of their remarkable history of financial success, corporate spin-offs are the subject of perennial interest and investigation. We critically review quantitative and case-based research to determine the conditions under which a spin-off divestiture provides beneficial results for the conglomerate, the newly independent subsidiary, and the stockholders. The shared goal of spin-off researchers is to understand the rationale for the financial success that spin-off firms and their newly disconnected conglomerates experience. Our review and synthesis of the findings include 30 years of academic research by scholars in strategic and business management, commercial research by independent researchers and consulting firms, and IRS and US Treasury documents that detail when a spin-off qualifies for a corporate tax-free exchange. Our central finding is that spin-offs, conglomerates, and stockholders benefit from tax-free divestiture and subsequent refocusing by the companies. The article explains the breadth of spin-off divestitures and the benefits of their success in the US. These results center on helping decision-makers recognize the situational factors that support the choice of a spin-off strategy.