With its changing structure, the business world is signing new trends every period. While many of these trends come and go, some of them manage to make a difference. The spin-off concept, which we are accustomed to hearing in popular culture, is one of them. Although this concept is commonly translated as "by-product" or "divided business" in our language, it refers to a kind of growth strategy. We have compiled for you those who are curious about this concept that changes the game's rules incorporate business life.
What is Spin-Off?
A spin-off, a management strategy used by giant companies, means growth by division. Thanks to the spin-off, the parent company can establish independent subsidiaries. In other words, the giants of the business world prefer division to get rid of their cumbersome structures and restructure themselves. Thus, internal units become corporate, profitability increases. Furthermore, global and domestic brands incorporate their activities in different business lines thanks to spin-off investments. Therefore, we can talk about a more focused growth.
Why Does the Business World Prefer the Spin-Off Strategy?
Underlying this preference is the desire to accelerate the slowing profitability cycle. Therefore, spin-offs are preferred to increase the parent company's market value. Generally, two ways are followed when the division takes place. One of the methods adopted is to sell the shares of the divided company to the shareholders of the parent company. Thus, a higher total value can be created thanks to spin-offs with the same shareholder base. Another method is to turn the newly created subsidiaries into a separate profit center from the parent company. However, in this method, the shared control of the new company remains with the parent company.
The spin-off may also result from the desire to focus on a single sector. Market-leading parent companies can develop different strategies in different sectors when it comes to growth, but this makes it difficult to focus on the main field of activity and leads to a loss of qualification. The reflection of this loss on the market is felt as a decrease in market value and profit. When the uneasiness of the shareholders is added, the pressure can be reduced thanks to spin-off investments. While the parent company moves forward with an optimum focus on the significant activity, investment opportunities are captured through an internal split. As a result, companies established in promising industries continue to benefit parent company profitability as spin-offs.
Although the managers usually make internal division decisions, there may be shareholder pressure. As a result, the company's management staff may not adopt the proactive attitude of the shareholders. In fact, the parent company may be too clumsy to adapt to new business models with an innovative approach. In the case of scenarios such as the current management's attitude towards innovative investments, spin-off investments can become attractive to shareholders. Instead of a complicated renewal process in the parent company, a new company can be established with a more dynamic and young staff. Thanks to this spin-off company, innovative investments can be based independently of the parent company.
How Do Companies Benefit From Spin-Off Strategy?
Many companies that prefer to focus by division are very profitable from sales agreements. A company in different sectors may not be attractive to buyers because of the focus problem. However, each industry can be turned into a separate company with a spin-off division. It can be much easier to find individual buyers for these companies channeled for a single purpose. In this way, a parent company considering sales can maximize its value in the short run.
If any line of business poses a risk to others, the spin-off benefits both the parent company and the spin-off company. A business line, which negatively affects the total profitability of the parent company, begins to operate on its own. This split reduces the parent company's risk of loss and helps keep overall profitability at the targeted level.
Companies operating in different fields simultaneously may experience management synergy problems. For example, one of the fields of activity may not adapt to the other branches of the parent company. For this reason, parent companies may even consider exiting an efficient industry or market. However, instead of losing its market share, the division may be preferred for this business line, which does not provide synergy. Thus, this business line can become a company with a spin-off and achieve success and profitability in the sector in question.