Spin-off

Separating a business by distributing shares in it to the parent's existing shareholders. No cash comes in, but it is often tax-free, sharpens focus and gives investors a pure-play holding.

Where you will meet it

Spin-off appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Set out the uses of equity valuation
  CFA Level II · Equities

  “Analysts use it to find mispriced shares, to infer the expectations built into a market price, to assess corporate events such as mergers, spin-offs and recapitalisations, to give fairness opinions to boards, to test management's strategy, to communicate with investors and to value private businesses.”

• Set out the kinds of corporate restructuring and why issuers undertake them
  CFA Level II · Corporate Finance

  “Divestment actions shrink it: sales of businesses for cash, and spin-offs, in which a unit's shares go to existing shareholders.”

• Explain the features of special situations investing and the risks it brings
  CFA Level III · Private Markets Pathway

  “Special situations are event-driven, opportunistic investments that arise from corporate or market events: distressed debt and restructurings, rescue or bridge financing, spin-offs, forced asset sales, litigation finance and changes in regulation.”

• Explain valuing a firm as the sum of its parts and why conglomerates trade at a discount
  CFA Level II · Equities

  “The discount is often cited to justify a spin-off, but the trap is assuming a break-up will release the value automatically.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with S · Glossary