Spin-off and split-off are components of divestiture, which involves dividing a company or selling part of it to another company and creating a separate branch.
Key Takeaways
- A spin-off involves creating a separate, independent company from a parent organization’s business unit. At the same time, a split-off entails exchanging shares of the parent company for shares in the newly-formed subsidiary.
- In a spin-off, existing shareholders receive proportional shares in the new company. In contrast, shareholders must choose between retaining shares in the parent company or obtaining shares in the subsidiary in a split-off.
- Both methods aim to improve business focus and unlock shareholder value, but their approach and impact on shareholders’ portfolios differ.
Spin-off vs Split-off
Spin-off creates an independent company from a business unit, while split-off exchanges shares of a subsidiary for shares of the newly created company. Spin-offs unlock value for shareholders, while split-offs let them choose.
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In a spin-off, shareholders enjoy shares of two companies, whereas, in a split-off, shareholders exchange their stocks for new subsidiary shares. In a spin-off, the business division creates an independent company from the parent company, which operates independently.
Split-off is the condition in which the holding company’s shareholders have shares in a subsidiary which is split-off for the exchange of shares in the holding company. Implementing the two strategies helps companies reduce risk by avoiding legal consequences that they might experience if their shares are in one company.
Reasons for spin-off and split-off
Companies do spin-offs and split-offs because it is a method used to create agency costs and tax shields for the parent company. It offers the parent company an opportunity to improve its management.
It ensures the concentration of managers on the productive divisions of the company. The use of the strategies improves forecast and research in the parent company.
Less complicated divisions enable the analysts and researchers to collect adequate information and project company sales. Companies also do spin-offs and split-offs to increase profitability by changing the company’s administrative structure.
It aids in streamlining workflow in the company, whereby the parent company spins unproductive sectors for a new company. The parent company creates spin-offs from existing departments and sections in the company.
By separating the division from the parent company, the division is expected to bring more profits. Unlike when it was part of the company, the division’s independence allows it to make strategies to improve profitability.
Comparison Table
| Parameter of Comparison | Spin-off | Split-off |
|---|---|---|
| Meaning | A company forms a new entity from a large company. The new division is independent of the stock exchange and management board of directors. | It is a corporate divestiture whereby a company subsidiary turnout into a separate entity. It lists its capital stocks independently. |
| Shares | Shareholders get shares in the parent company and the new division. | The shareholders in the holding company are required to exchange their shares for getting shares in the subsidiary. |
| Reason | Create a separate identity for a new firm. | Distinguish transactions between the core business and the new division. |
What is Spin-off?
It involves separating a division from the parent company to form a new company. The shares are then allocated to the shareholders according to their holdings, aiming to cater to the loss of equity in initial stocks.
The company’s owner does not change since the shareholders will be the same and own given shares.
The shareholders can retain the shares or sell them to interested parties. Companies prefer it since it allows them to manage the division with high potential in the long-term range.
The parent company moves all the workforce, copyright issues, trademarks, and royalties to the new division through this strategy. The existing shareholders are at an advantage as they enjoy the parent and subsidiary company shares.
The parent company must allocate 80% of voting and non-voting shares for the subsidiary company to operate. After the parent company’s removal from management, the new subsidiary can be accountable and responsible for its transactions.
What is Split-off?
The strategy involves the division of shareholders from the parent company. The shareholders allocated to the new company sell their shares in the host company. It is a form of stock repurchase whereby the parent company buys back its shares.
In split-off, shareholders are divided hence the term split.
The shareholders who break away from the parent company become the shareholders and owners of the new entity, while the remaining shareholders own the parent organization. The strategy benefits both the parent company and the subsidiary through protection from hostile takeover and benefits the holding company by selling shares.
Main Differences Between Spin-off and Split-off
Meaning
The spin-off is a divestment strategy in which the parent company is divided into a new subsidiary which is independent in legal matters from the parent company.
Split-off, on the other hand, is a restructuring strategy in which the shareholders of the new subsidiary are the former shareholders in the parent company. The shareholders sell their shares in the host company and then move to the new division.
Shareholders Ownership
In a spin-off, shares of both the new division and the host company are shared among shareholders. The strategy does not require shareholders to give up ownership in the parent organization for them to operate in the new division.
On the other hand, shareholders of the subsidiary company in split-off are required to give up their shares in the parent company. Those who give up their shares in the parent organization can be allocated shares in the subsidiary.
Parent Company Resources
In a spin-off, corporates use the parent organization’s resources to create an identity in the subsidiary company. However, in a split-off, the parent company resources are not used in the subsidiary.
The parent organization lacks the authority in the subsidiary and cannot differentiate its operations from its own. It is the responsibility of the shareholders to decide on their actions.
Tax Treatment
Most companies prefer spin-offs because it is tax-free. The strategy frees the parent company from additional tax charges.
Split-offs, on the other hand, are interested in financial viability. The parent company is not guaranteed to enjoy the tax-free privilege.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
