What
is a spin-off?
A
spin-off occurs when a parent company divests itself of a subsidiary or a division
of the company. The subsidiary or division then becomes a separate, independent
company.
What does
a spin-off mean for shareholders?
Shareholders
of the parent company will normally receive shares of the spin-off company. The
investor, generally, will receive one share of the spin-off for a pre-determined
amount of shares of the parent company that the investor holds. For example, Bristol
Myers Squibb (BMY) spun off Zimmer Holdings, Inc. (ZMH) on August 6th, 2001. BMY
shareholders received one share of ZMH for every 10 shares of BMY held.
How
does the shareholder determine cost basis for a spin-off?
Generally,
the parent company will determine the percentage of the shareholder's cost basis
in the parent company that should be allocated to the new spin-off company. This
information can usually be found at the parent company's Web site. If not, contact
the company directly and ask. In the case of the ZMH spin-off, 4.8223% of the
original cost of each shareholder's BMY shares was allocated to the ZMH shares.
For instance, if an investor purchased $1,000 of BMY, the initial ZMH cost basis
would be $48.22. After the spin-off the BMY cost basis adjusts to $951.78 ($1,000-$48.22).
For
capital gains tax purposes, how does the shareholder determine the purchase date
for a spin-off?
The
spin-off company has the same purchase date as the shares of the parent company.
The date the spin off occurred is not the date used to determine if a gain is
long or short-term.
Are
there any tax consequences to a spin-off?
The
distribution of stock in a spin-off normally has no tax consequences. However,
many companies will send checks to shareholders for cash in lieu of fractional
shares. Essentially, this means that any fractional shares that the investor should
receive were instead sold and a check was issued for the proceeds. There could
be a capital gain or loss depending upon the newly assigned cost basis and the
sale price. In general though, it is usually a very small, if any, tax consequence.
Again, let us use the
ZMH spin-off as an example: If an investor owned 125 shares of BMY, he or she
should have received 12.5 shares of ZMH. However, the investor received only 12
shares of ZMH and a check for the proceeds for the sale of 0.5 shares.
How
does The Henssler Financial Group handle spin-offs?
The
Henssler Financial Group (THFG) often sells spin-off companies immediately after
they occur to stocks in our model portfolio. The stocks held in the Henssler Model
Portfolio have to meet certain standards of quality and financial safety. If the
company created in the spin-off does not meet certain criteria, THFG will sell
it. If the spin-off company does meet the criteria, THFG will determine if it
is a company that we want in the model portfolio. There is often a lot of uncertainty
involved with spin-off companies because there is not enough historical data available
to determine how well the company manages itself on its own. For these reasons,
THFG sells most spin-offs.
