Corporate Tax

As Dell Applied sciences prepares to divest from VMWare, analysts anticipate spin-offs could speed up amid a assured financial outlook

Top line

While spin-offs slowed over the past year as the uncertainties surrounding the pandemic made it difficult for companies to assess the value and prospects of their units, analysts now believe that the frequency of spin-offs will increase as confidence in the economic recovery is growing.

CHINA – 2021/03/27: In this photo illustration the American multinational computer technology … [+] Dell company logo on a smartphone with a United States flag in the background. (Photo illustration by Chukrut Budrul / SOPA Images / LightRocket via Getty Images)

SOPA Images / LightRocket via Getty Images

Key factors

In spin-offs, a company distributes shares in a subsidiary to its shareholders, creating a separate publicly traded company and typically increasing in frequency when investors are optimistic about the economic outlook.

The main purpose of a spin-off is to dispose of non-core or sub-par businesses and free up value that may not be reflected in the parent company’s share price. Thomas W. Greenberg, a corporate attorney whose practice focuses on mergers and acquisitions at Skadden, Arps, Slate, Meagher & Flom in New York, told Forbes.

While unable to provide specific numbers, Greenberg noted that spin-off activity declined in 2020 compared to 2019 and 2018 due to the uncertainties created by the pandemic, pointing out that companies were doing less at a time when they were likely seeking a separation their companies struggling to maintain their operations and stay afloat.

One of the advantages of a spin-off over an M&A deal is that there is no “third party buyer” to complicate matters, Stephen I. Glover, associate at Gibson, Dunn & Crutcher, a Washington, DC-based law firm with significant experience Business spin-offs, Forbes said.

Glover also told Forbes that spin-offs had declined over the past year as companies weren’t sure how the pandemic would play out. “But we have seen an increase in spin-off activity since the end of last year.”

Greenberg also stated that a key advantage of spin-offs is that they can be conducted tax-free, “at both the corporate and shareholder level, making them preferable to a taxable unit sale.”

Key background

While spin-offs are likely to pick up this year as companies gain more clarity about the shape of the post-pandemic economy, Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, an investment firm based in Newport Beach, Calif., Told Forbes This They would only outsource large tech companies with highly profitable but non-core units if they were forced to do so by state regulators on antitrust issues. Therefore, it is unlikely that Google, Facebook and Amazon will outsource YouTube, Instagram and Amazon Web Services unless the regulators put pressure on them. “Biden could get them to give up these subsidiaries, but even if the government did go that route, it would take years of litigation,” he said. “After all, the Microsoft antitrust case lasted a decade.” While Dell Technologies is in the process of outsourcing its cloud computing unit VMWare, Greenberg noted that “spin-offs are being considered in almost all industries,” although he noted we could see a large number of spin-offs this year from diversified technology, healthcare, financial and industrial companies that have expanded their business in recent years. “As companies in these industries have grown and evolved over time, the benefits of separating and specializing in ‘pure’ companies may be more pronounced than they have been in the past.”

tangent

Media internet company IAC Interactive, which plans to outsource its Vimeo video sharing subsidiary in June, has had a particularly successful track record of spinning off its assets, including online travel company Expedia in August 2005 and online – Lending Tree lending company, ticket seller Ticketmaster, leisure services company Interval Leisure Group and retailer HSN Inc in August 2008. Last summer, IAC spun off Match Group, the owner of various online dating sites.

What to look for

Glover also expects the spin-offs to continue at a very healthy pace in the near future as companies look for ways to “focus their business strategies and provide greater advantages to their shareholders.” However, Gokhman noted that while companies have amassed a huge pile of cash, they are more likely to engage in M&A transactions than spin-offs. “The pros or cons of splitting versus selling assets vary by business,” he said. “In some cases, a company can choose to sell a non-core business when no other party, such as private equity firms, is trying to buy it.”

Surprising fact

While some on Wall Street are concerned about the potential impact of Joe Biden’s various tax hike proposals, Greenberg sees nothing in the White House that could prevent spin-offs. On the contrary, Greenberg points out that if corporate tax rates were raised, as suggested in Biden’s proposals, there would be “greater interest in tax-free spin-offs versus taxable sales transactions.”

further reading

Spin-offs have underperformed dramatically. How To Benefit From Them (Forbes)

3 things to consider when deciding to start a spin-off business (Forbes)

Spin-Offs Outperform the Market This Year (Forbes)

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