Difference Between Spin-Off and Divestiture

It is an undeniable fact that companies may face some challenges in their business. The challenges could be related to cash, debts or about making less profit.

Two such procedures are spin off and divestiture. These terms soften confuse people due to their relevancy in distributing or selling assets.

Spin-Off vs Divestiture

The difference between spin off and divestiture is that spin off is defined to be the process of reducing shares of a company to create an independent company.

Spin off vs Divestiture

Divestiture means getting rid of shares for various reasons. It may be to pay back debt, solve a money problem or create additional profit.


 

Comparison Table

Parameter of ComparisonSpin offDivestiture
DefinitionGetting rid of shares of an existing company to make a new company.Getting rid of business assets for multiple reasons.
ObjectiveTo focus on a particular sector of the parent company for more profit.Pay debts, get cash, focus on a few important product lines.
InheritanceInherits the management structure and other assets of the parent company.Once the assets are sold, the company has no say in how they are further used.
DrawbacksThe costs may increase because the parent company needs to with the spin off tooThe decision may be taken without expert advice and the product may no longer exist for re-selling.
ExampleeBay establishing a spin off PayPal.Thomson Reuters distributing its property to minimize costs.

 

What is Spin-Off?

Spin off is the process of creating a new company through distributing and selling some of its shares. This new independent unit will have its own rules and management.

There could be various reasons for spin off. The company may want to work on the most profitable unit of their company and make it a separate division.

So the company may do so by a spin off. Certain drawbacks accompany the spin off procedure. Since the spin off will also generate costs like that of rent, tax, maintenance so the parent corporation needs to handle that too.

When the spinoff is finally able to stand on its feet, it may need a proper operational unit, marketing unit and management. So it needs long term support from the parent company.

spin off 2
 

What is Divestiture?

Divestiture is a process that businesses use to dispose some of their assets. There are various reasons for that. This usually happens when the companies are focusing on many different product lines and it is getting harder for them to manage. 

Some product lines are just not making enough money and their product lines are under-performing. Sometimes, the businesses are in debt and need to overcome the problem of cash flow.

Sometimes, the same business opens its branches in several locations and not every branch may be making a profit for you.

You can have a look at your assets and try to divest those which would be able to make more cash for you. You can analyze your product lifecycle. The best time to end your product line would be when it has reached its decline stage.

divestiture

Main Differences Between Spin-Off and Divestiture

Some of the features that differentiate between spin off and divestiture are given below:

  1. The drawback of spin off is that the company costs may rise because the parent company needs to take care of the spin off too initially whereas the drawback of divestiture is that the agreement may be made in a hurry and the product may be permanently gone.
  2. Example of spin off includes eBay creating a spin off PayPal. Example of divestiture includes Thomson Reuters selling its property to reduce costs.

References

  1. https://www.sciencedirect.com/science/article/pii/0304405X83900429
  2. https://academic.oup.com/rfs/article-abstract/20/3/557/1563919
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