Difference Between Spin-off and Split-off (With Table)

Spin-off vs Split-off

The key difference between Spin-off and Split-off lies in the fact that in a spin-off, the parent company distributes the shares of the divested company to the existing shareholders, whereas in a split-off, stocks of the divested company are transferred to the parent company.

In a spin-off, shareholders enjoy shares of two companies, whereas, in split-off, shareholders exchange their stocks for new shares of the subsidiary.

Spin-off and split-off are components of divestiture, which involves dividing a company or selling part of it to another company leading to the creation of a separate branch.

In a spin-off, the business division leads to the creation of an independent company from the parent company which operates independently.

Split-off is the condition which the shareholders in the holding company have shares in a subsidiary which is split-off for exchange of shares in the holding company.

The implementation of the two strategies helps companies in risk reduction 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 create 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 researcher s to collect adequate information and project sales of the company.

Companies also do spin-offs and split-offs to increase profitability by changing the administrative structure of the company.

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.

Through the separation of the division from the parent company, it is expected that the division will bring more profits.

The independence of the division gives it room to make strategies geared towards improving profitability, unlike when it was part of the whole company.


 

Comparison Table Between Spin-off and Split-off (in Tabular Form)

Parameter of ComparisonSpin-offSplit-off
MeaningA company forms a new entity from a large company. The new division is independent in the stock exchange and management board of directors.It is a corporate divestiture whereby a company subsidiary turnout as a separate entity. It lists its capital stocks independently.
SharesShareholders get shares in the parent company and in the new division.The shareholders in the holding company are required to exchange their shares for getting shares in the subsidiary.
ReasonCreate a separate identity for a new firm.Distinguish transactions between core business and the new division.
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What is Spin-off

It involves the separation of 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 loss of equity in initial stocks.

The ownership of the company does not change since the shareholders will be the same and own given shares in the company.

The shareholders have the option of retaining the shares or selling to interested parties.

Companies prefer it since it allows them to manage the division with high potential in the long term range.

Through this strategy, the parent company moves all the workforce, copyright issues, trademarks, and royalties to the new division.

The existing shareholders are in an advantaged position as they enjoy shares of the parent and the subsidiary company.

For the subsidiary company to operate the parent company must allocate 80% of voting and non-voting shares.

It is after the removal of the parent company from management that the new subsidiary can be accountable and responsible for their transactions.

Spin Off
Spin-off example
 

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 to the holding company through the selling of shares.

Split Off
Split-off example

Main Differences Between Spin-off and Split-off

The two strategies are used by companies to form new divisions. There are notable differences between spin-off and split-off depending on various factors.

Yhe following discussion outlines the differences between split-off and spin-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.

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The shareholders sell their shares in the host company 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 then 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 are legible to be allocated shares in the subsidiary.

Parent Company Resources

In a spin-off, corporates use the parent organization resources to create an identity in the subsidiary company.

However, in split-off, the parent company resources are not used in the subsidiary.

The parent organization lacks the authority in the subsidiary and cannot differentiate their operations from that of their own. It is upon 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 of enjoying the tax-free privilege.


 

Frequently Asked Questions (FAQ) About Spin-off and Split-off

  1. How does Spin off affect stock price?

    How the stock price is affected after a spinoff depends on the retention of the entity that has been spun-off.

    The pre-spinoff price of a stock should be nearly equal or similar to the sum of the after-spinoff price of the stock added to the initial stock price of the corporation that has been spun-off.

    If a parent company retains some portions of the spun-off entity, things become more complicated.

    For example, if the parent company retains 50% of the spun-off company, the share price is supposed to be equal to the value of its business, plus a 50% stake retained from the spun-off entity.

    Spin-offs can be reflected on a brokerage statement and different brokers have different formats.

  2. How are Spin-offs taxed?

    Spinoffs can be taxed. A spinoff that can be taxed is a divestment by a corporation traded publicly, subject to taxation on capital gains.

    For transactions to be taxable, the parent company must divest through the selling of properties or division it owns directly.

    The capital gains made as profits will be taxed. A taxable spinoff brings in liquid assets in the form of cash to the company.

    A disadvantage of this transaction is the decrease in income acquired from the capital gains. To avoid taxation, a parent company may consider a tax-free spinoff.

  3. What Does a Spin-off Mean for Employees?

    Proper arrangements for employees are usually done before a spinoff is executed.

    When preparing a subsidiary for a spinoff, a parent company usually removes any overlapping roles of employees and dedicate the employees to either the parent or subsidiary.

    The overlapping usually occurs within administrative positions such as accounting, human resources, information technology and purchasing.

    Companies should make sure that all knowledge and resources do not remain with the parent company. To operate on its own, the subsidiary needs a pool of experienced employees.

    Spinoffs can also lead to uncertainties, causing employees to resignations.

  4. How does a Spin-off work for shareholders?

    Corporations that have subsidiaries and divisions may not put in enough effort or resources to the entities.

    This may hinder their development and advancement.

    Also, shareholders of the parent may conflict with managers of the subsidiary regarding operational, strategic and monetary issues.

    In such scenarios, management conflict can be reduced by enabling the spinoff to have a separate board of advisors and directors focused on the company's needs.

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Conclusion

Companies need to conduct spin-offs or split-offs in case of low productivity in the company.

The division to two companies offers an opportunity to concentrate on critical areas.

Companies prefer spin-off strategy because the shareholders retain their shares in both the parent company and the new division.

Through the ownership of shares in both companies, the shareholders are covered in case one company collapses or fails to produce.

Split-off offers the shareholders with a greater chance of growing in case the new company picks up.

The revenue is shared among a few members since they are independent of the parent company.


 

Word Cloud for Difference Between Spin-off and Split-off

The following is a collection of the most used terms in this article on Spin-off and Split-off. This should help in recalling related terms as used in this article at a later stage for you.


spin off and split off 3
Word Cloud for Spin-off and Split-off
 

References

  1. https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2072&context=dlj
  2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=241226