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As uncertainty in the domestic and international business environment grows, companies are employing desperate strategies to survive and grow. One of these strategies is "corporate spin-offs." A corporate spin-off involves separating business divisions or assets from an existing company and establishing one or more new, independent entities.
Hanwha Aerospace, which focuses on the defense and aerospace industries, recently announced its decision to split off its business, receiving positive reviews. While Hanwha Aerospace has operated a variety of businesses, including industrial equipment, in addition to its existing aerospace and defense businesses, the company has set a clear goal of cleanly separating these diversified businesses through a physical spin-off and focusing the remaining entity's capabilities on its core defense business.
This act of simply splitting the company in two can also be a strategic choice to improve the company's fundamental constitution and thereby gain a higher valuation in the market.
In this column, we will explore the basic concepts of corporate spin-offs, their main types, and the strategic benefits and expected outcomes that companies actually seek through spin-offs.
1. Main types and characteristics of corporate divisions
When a company decides to split, the first thing both management and shareholders must consider is the method of division. Corporate splits are broadly categorized into two methods: physical splits and human splits. Depending on the method, the ownership of the new company changes and the impact on corporate value also varies.
(1) Split-off
A spin-off is the most common division method. A spin-off involves an existing company (parent company) spinning off a specific business unit to establish a new company (subsidiary), with the parent company retaining full ownership (100%) of the new company's stock. After the spin-off, the parent company and subsidiary form a vertical parent-subsidiary relationship.
In this case, the parent company maintains control over the new company through a 100% stake, while the spun-off subsidiary has an independent decision-making system and can focus solely on its business, enhancing management efficiency. Furthermore, if the new company, which operates a core business, is spun off and listed, it can facilitate large-scale financing.
However, existing shareholders may not receive shares in the newly created company with the core business separated, and instead, they may only hold shares in the undervalued parent company, which may result in the dilution of the value of existing shareholders.
(2) Spin-off
A spin-off is a method whereby an existing company is divided into two or more companies, with the existing company's shareholders directly dividing the shares of the new company according to their original ownership ratios. After the spin-off, the two companies become independent entities with no controlling interest.
Shareholders will own shares of both companies, benefiting from the potential value of the separated businesses. Furthermore, each company will be independently evaluated by the market, providing an opportunity to clearly reveal the value of growth businesses previously hidden behind non-core businesses.
However, immediately after the spin-off, the existing major shareholder loses direct control over the new company. Therefore, the major shareholder must undergo complex and additional procedures, such as in-kind contributions and treasury stock use, to secure control.
(3) Split merger
A spin-off merger is slightly more complex than a simple spin-off. A spin-off merger involves an existing company separating a specific business division and merging it with another existing company (the merging company). There are two types of spin-off mergers: a spin-off merger, in which new shares issued by the merging company are directly distributed to the shareholders of the spin-off company, and a physical spin-off merger, in which the spin-off company directly owns the new shares issued by the merging company.
This allows the spun-off company to separate non-core business divisions and focus its capabilities and resources on its core businesses, while the merged company can maximize corporate value by creating synergies with its existing businesses.
However, spin-off mergers carry the risk of higher transaction costs due to more complex transactions and conflicts with various stakeholders.
2. Purpose and expected effects of the division
The reason companies choose to split their companies, spending enormous amounts of time, money, and obtaining shareholder approval, is to unlock potential value not currently reflected in their stock prices and maximize management efficiency.
Through spin-offs, each business unit can focus its resources and specialize as an independent legal entity within its specific area. This simplifies decision-making and allows each division's management to quickly develop and implement strategies tailored to the market environment, thereby enhancing competitiveness.
Furthermore, when core and non-core businesses are mixed, the market tends to evaluate the entire company based on an average (value discount). Separating high-growth, cutting-edge businesses (e.g., batteries, bio) allows investors to focus solely on their potential. This, in turn, provides an opportunity for the market to recognize a high price-to-earnings ratio (PER) appropriate for the business segment, leading to a revaluation of the company.
3. In conclusion
A successful corporate spin-off goes beyond simple organizational restructuring; it becomes a key strategic tool for companies to overcome current inefficiencies and secure future growth engines. However, achieving all these goals and expected benefits requires selecting the right spin-off method and implementing proper accounting practices.
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