Can anyone explain the mechanics (with regards to ownership and shares) of the scenario I described in the Title? Here are two examples:
Mailgun, an email delivery service for developers, which was acquired by Rackspace in 2012, raised $50 million in funding and is being spun out as an independent company. Turn/River Capital led the round, and was joined by Scaleworks and Rackspace.
Reddit, previously acquired by Conde Nast, is also once again an independent company.
Does it basically mean that investors offer cash to the previous acquirer in order to put shares back in the original corporate entity?
It’s more likely that the parent company does an IPO for the spinoff (i.e., more likely than “that investors offer cash to the previous acquirer in order to put shares back in the original corporate entity”), perhaps retaining some stake in the spinoff
There are at least two ways in which this might happen. Let’s suppose for convenience that the spin-off company has always been a subsidiary of the parent, and thus had its own corporate existence despite having its stock owned by another corporation rather than be closely-held by individuals or publicly owned. And let’s say it was a 100% subsidiary, having no minority interest.
The parent distributes the stock of the subsidiary as a property dividend to its own shareholders. Then the stock of the ex-subsidiary, while owned initially by the same people who owned them ultimately before, can now be traded independently of the stock of the parent corporation. After shareholder turnover, a board of directors might be elected that’s different from whom the parent company would install on their own, and thus the ex-subsidiary can go in its own direction.
Someone buys the subsidiary’s stock from the parent. This “someone” might be the public-at-large; i.e., an public offering of stock that might be a travesty to the language to call an IPO if the same legal corporation already made an IPO in the past. The new owners can then install their own board of directors.
I’m sure there are names in the business world for those, and there might be other ways that are legally distinct from these two, but the above show that there’s not necessarily one way that spin-off is legally handled.
If the legal existence of the subsidiary was terminated and the assets transferred to the parent, then there would be an extra step of forming a new corporation and transferring the assets back into that new corporation in return for all of its stock, leaving it somewhat similar to how it would have been if its legal existence didn’t terminate, but definitely being a different entity legally.
The one situation with which I am most familiar went like this:
Independent company was bought by mega-corp.
Mega-corp decided that they did not want to continue diversification through that purchase.
Management used the employee pension fund to buy the company from mega-corp. (Federal law was changed to prevent that sort of thing the next year.)
After a few years proving that they could succeed without going bankrupt, management held an IPO to go public, again.
Each company in the OP split by creating a new company whose stock is partly owned by the original company and partly sold to investors to raise cash. All original stockholders continued to own shares in just the original company.
An example of the other method is HP’s recent split into two companies. If you had 100 shares of HP stock before the split, you then ended up with 100 shares in each of the new companies. (One for servers and such. The other for printers, etc.)
A lot probably depends on how integrated with the parent company they are. If they’re essentially an owned, but independent company, it’s mostly a matter of changing who owns the stock and who sits on the board.
If they’re an owned, but not-so-independent company, then they may have to do things like spin up their own IT, payroll, etc… departments if those were tightly integrated with the parent company.
Where I work is a company that’s technically owned by a holding company that is itself 51% owned by the parent company, and 49% by a venture capital company, but in practice, several aspects of our operations are very tightly integrated with the 51% company- stuff like IT, payroll, HR, etc… are all done either wholly out of the home office, or are done in part here, and part there. Spinning us off to be independent would cause us to have to literally regenerate those functions in-house.
Prior to our acquisition, we were owned by a different (huge) company, but we weren’t really integrated too much, so we had our own payroll dept, for example.
No its not that rare.
Its actually done quite often. One reason is that it can be a good way to avoid causing the shareholders a tax pain… See , if they just float the company and then pay the cash to the shareholders as dividend, then the shareholder has to declare the divident as INCOME and then its income in the year the dividend was paid, it can’t be averaged out. But giving over shares to the shareholders , thats giving the shareholders the option to hold onto the capital and if they do sell it, its the sale of shares not receipt of dividend.
I got paid a capital reduction payment from shares I owned.
The company decided that it owned too much real estate, and sold some.
This would leave them with too much cash, and they were forced to reduce that… The obvious thing would be simply put the cash as an extra large dividend … But share holders would then be forced to treat the return of captial as if it was income… they’d have pay income tax on it… some of them would be paying income tax at a high rate.
So they used an option to declare the refund to the shareholders to the tax office , and pay a tax on behalf of the shareholders at the rate of a capital gain, and thus save the shareholders from having to treat the payment as income.