There are approximately 50 spinoffs each year in the United States. Expedia made headlines several years ago with its spinoff of Trip Advisor. Currently, the business world is buzzing over when and if EBay, Inc. will spinoff its extremely successful PayPal unit. In a traditional spinoff, a corporation distributes 100 percent of its ownership interest in an existing division or business unit as a stock dividend to existing shareholders. Alternatively, shares can also be sold to the public via an initial public offering (IPO) transaction known as a “carve out.” In either case, the end result is a new and distinct corporate entity.

In many cases, corporations choose to break off a subsidiary or business division in order to streamline their operations.

Likely candidates include unrelated or underperforming units that may perform better on their own, while also allowing the parent company to focus on its core products or new offerings.

As with any corporate divestiture, there are both benefits and disadvantages. Spinoffs are beneficial because they result in so-called “pure play” companies that are attractive to investors because of their narrow focus on one particular industry segment or business strategy. Spinoffs also allow each company to pursue individual capital structures, operation plans, and growth strategies that are tailored to its business needs. They also do not generate tax liability, while proceeds from a sale are subject to capital gains taxes.

Of course, there are downsides. While share prices generally stabilize or even perform better, both the parent and the spinoff are likely to experience volatility in the short term. In addition, spinoffs can be extremely long and complex transactions, particularly in cases where the unit to be spun off is deeply interconnected with the parent company. As with any potential divestiture, careful planning and consultation with a team of experienced professionals is key to success.