Principles of Private Firm Valuation

perception quickly changed, and yet the money management subsidiary
retained the cachet of being affiliated with a large, financially strong parent.
Subsequent to the spin-off, the firm’s performance improved relative to peer
companies, and the hoped-for increase in customers and cash flow followed.
While spin-offs make sense, the real question is whether they create value.
There have been a number of academic studies that indicate that spin-offs

24 PRINCIPLES OF PRIVATE FIRM VALUATION

FIGURE 2.4 Spin-Off

(a)Pre-Spin-Off Company

Company A without B

Shareholders

Shareholders receive

shares of B.

New company B

Shareholders still own shares of Company A, which now represent

ownership of A without B.

(b)Post-Spin-Off Company

Company A without subsidiary B

subsidiary B

Shareholders

Shareholders own shares of combined company and therefore also own

implied equity in the subsidiary.