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A Stock Spin-Off is a corporate action where a company separates a business operation and creates a completely new entity, normally as another public company.
Corporate spin-offs are rare, occurring for about 2% to 3% of large US companies annually. Shareholders receive shares of the new entity and the value of their current stock drops by the same amount. Some pricing services account for spin-offs as special dividends.
Synonym: corporate spin-off
For context, let's review an example of a stock spin-off that occurred recently. Effective April 3, 2020, in a fairly complicated transaction, Raytheon and United Technologies merged, terminated Raytheon's stock, took that of United Technologies and renamed it Raytheon Technologies. At the same time they enacted two stock spin-offs of the Otis Worldwide and Carrier Global businesses as separately traded stocks.
The tax treatment of a corporate spin-off can be difficult to reconcile. Details about cost basis can be found at company investor relations website. Spin-off details are provided in 'Current Reports' 8-K filings with the SEC.
Of course, the holder can sell the stock before the spin-off record date to avoid extra tax filings.
Doc: Can someone explain the logic for why
the Board of Directors would initiate a stock spin-off?
Tom: Wouldn't it be like a pastry shop selling
the best piece of a pie at a higher price than the other slices?
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More than 3 Quarters
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Still unclear on Stock Spin-Offs? Check out the Quant 101 Series of 27 tutorials on financial modeling in Excel.
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