A spinoff is a new, separate, independently managed company created from a division of

an existing company or organization. To use a popular example, AOL (AOL) was a unit of
Time Warner (TWX) until late 2009, when it was spun off as an independently listed
public company.
Spinoffs fall into several sub-categories, some accessible to passive investors, and some
not.
Spinoff Distribution: shares in the new company are delivered as a stock
dividend to shareholders in the parent. For example, if you were a shareholder in Viacom
in early 2006, you received a dividend of CBS stock. This is the most common category,
and most attractive from an investment perspective, for a number of reasons explained
in our research.

A spin-off is merely a startup spawned by a mature parent (company), and conventional logic would
dictate that it has a survival advantage over the lowly startup. Yet spin-offs seem to most often fail to
launch in the real world. I was part of one myself a few years ago, and felt the pain, so the
phenomenon has intrigued me ever since.
My first thought is that spin-offs are like struggling adolescents with over-protective parents. When
companies spin off a division (sometimes called a demerger or deconsolidation), they naturally want it
to grow and succeed on its own merits, just as they have. But like protective parents everywhere, they
tend to shelter it in ways that stunt its growth in the long run.
Before we look at my specifics, I should mention some of the reasons companies make the spin-off
decision in the first place. Contrary to popular belief, according to a report byA. T. Kearney, these go
well beyond an organization getting rid of its "problem children:

Deconsolidateshed non-core functions to focus on core competencies. An example would

be Time Warner spinning off AOLto end a disastrous, dot.com-era marriage.
Mingle and learn from the startup culture and new technology without losing control.
Foreign companies in the US like to use spin-offs to find expansion opportunities.

Unlock shareholder value, which the spin-off can do as an independent entity. They may not
be so constrained by monopoly fears and Sarbanes-Oxley controls.

Grow faster, which a spin-off can do outside the parent company. Airlines, for example, have
difficulty scaling up through mergers and acquisitions (M&As), but they can spin off their
maintenance businesses and let the spin-off do the M&A in its own field.

Grow in new dimensions from the parent company. Service operations such as call centers
can grow far beyond their parent companies, especially if their services are more generic.

In retrospect, as in the case I was part of, I believe there were several areas in which the parent
company consistently fails in their discipline:

Rewarding without earning. The parent company guaranteed the spin-off a revenue stream
and provided incentive bonuses based on artificial objectives, rather than competitive or
market driven targets. The guaranteed revenue and incentives were only loosely tiedat best
to the spin-offs performance.

Fostering dictatorial leadership. Effective management skills in a startup are actually quite
different from those in a large enterprise. The dictatorial leaders who survived and prospered
in the enterprise parent, were ill-suited for the collaborative and highly adaptive spin-off and

startup requirements. Yet they had earned the right to run an autonomous unit, and were not
easily dislocated.

Supporting them for an undefined period. Parent companies provide services or

infrastructure to the spin-off at below-market prices or for an excessively long period of time.
In the reverse direction, this support carried the high overhead that is standard in the
enterprise, but not financially sustainable in the spin-off.

In my view, fostering successful spin-offs, like raising adolescents, often requires tough love,
embodied in the tough financial objectives and a firm timeline that startup investors impose on their
charges. No free passes, and no bailouts.
In most other ways, the success of a spin-off depends on the same factors that are critical to a
startup, but sometimes get forgotten or taken for granted as a corporation matures. These include a
clearly articulated vision and business strategy, communicated from leaders in a way that heightens
motivation and lessens team anxiety of the unknown.
For entrepreneurs, this analysis should be a positive message, but it should also be a wake-up call to
the overriding value of leadership and effective communication. For all of you who all too quickly tie
your business success or failure to funding, or the lack of it, think again. Sometimes it helps to be
hungry in that respect.