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Spin-Offs 101 And Value Creation

Tickers in this article: PFE SYF WIN ZTS

Spin-Offs: Why Do Companies Do It, And What They Might Mean To Your Portfolio William Hubbard, Benzinga

Synchrony Financial , also known as GE Capital, spun off on Thursday.

Earlier in the week, Windstream Holdings, Inc. received a private letter ruling from the IRS, regarding the tax implications of a spin-off consisting of its fiber and copper network.

The recent discussion and interest in companies shedding business units raises an important question for investors: What, exactly, is a spin-off?

A spin-off occurs when a company identifies a business segment and separates it by creating an independent, publically-traded company.

Why Spin-Off A Business Segment?

Companies elect to spin-off a business segment for a variety of reasons, usually dealing with focusing those businesses on core competencies. A spin-off allows each business to put in place operational and strategic plans that utilizes all forms of capital, including physical and human, without sacrificing another business segment.

Related: Is Transocean Partners The Yield-Producing IPO To Buy?

Each company can also benefit from being able to more effectively manage its identity with investors. Companies that focus in one area make it easier for investors to see opportunities — and to specify size, style and growth assumptions.

This transparency can remove some of the undervaluation conglomerates may cope with, as a function of their extreme size and complex business segmentation.

When a company is looking to realize the value of a particular business segment, it can spin it off or sell it to an interested buyer. If a sale to a third-party buyer is the chosen route, that sale will produce a large, up front cash infusion to the parent company. This type of transaction is not necessarily desired, because it causes a massive taxable event, and the deal may not even go through due to government regulation.