Can companies spin off other companies and unload debt?
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M$2 Answers
In addition, the creditor(s) would need to agree to the debt being unloaded on the spin-off. Business loans usually have collateral, which might include the original company's HQ building, plants, vehicle fleet, etc. If the spun-off company does not own the collateral, the creditors would presumably have to agree to replace the collateral with some other collateral that is owned by the spun-off entity. This is not likely to be approved in a case where the spin-off is intended solely to improve the parent company's financials, and where the spin-off is not a viable business.
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M$Spin offs are common in the business world. They can present smart investors with huge opportunities and sometimes, less fortunate investors with even larger losses. Spin offs are usually as simple as they sound – a parent company decides it can do without one of its business. So, the subsidiary is spun off onto its own.
There are four basic reasons for a parent to spin-off of one of his "sons":
* Unrelated businesses - often, companies like Sara Lee's own certain subsidiaries - as a coach and Hanes - They have nothing to possess. This happens often in clusters, where a given product is removed and held back by a parent organization.
* Tax benefits - taxes can be cumbersome and confusing. But occasionally, mathematicians and finance experts to find a loophole to save taxes and preserve shareholder value. Sometimes you need a spin-off for doing so.
* Reorientation - often a large company would take a look at their operations and find one of his businesses behind, which inevitably puts a strain on management to solve the problem. The best solution for this business division to manage the parent company can return to profitable growth companies. Often, this benefits both the parent and "child" of the company.
* Tweaks of debts - some indirect results are created to download from the burdensome debt and other liabilities. This is where many unfortunate investors have huge losses. As you can imagine, a company created by the need to relieve the debt is doomed from the start.
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M$
How can a company with high debt in a spin off be considered a great investment opportunity? The reality is that price of the spin-off often goes up.
The information provided seems to suggest that spin offs are less a magic trick and more a focus effort to help the spin off find a niche.
I am thinking about the Marriot spin off. How did that spin off work? Why could it be done?
The public owned shares in the spin off. The spin off company received a 600 million dollar loan from the parent company. The Parent company maintained licensing and contract management. The spin off represented devaluing real estate assets and loan debt.
It was legal, but it doesn't seem to change the fact that the company had an ugly baby.
Sorry, I don't know the specifics, and that level of finance is beyond my expertise. If they did it, obviously there's at least a quasi-legal way of doing it. It's possible that the fact that the parent company made the loan allowed them to circumvent having to come up with realistic collateral for the daughter company to secure the loan.
Frequently, when a spin-off is legitimate, the smaller size and more focused approach of the spin-off allows it to out-perform the parent company.
Why do investors pay more for stock in the spin off when the debt has not changed?