Spin-Off, Split-Off, Split-Up vs Carve-Out: Difference and Comparison

Divestiture uses several methods and options like spin-offs, split-offs, split-ups, and carve-outs so that parent companies can efficiently divest to manage their portfolio strategy which would in turn help achieve their financial goals.

These four terms are corporate actions companies (in this case, the parent company) adopt when they purchase or hold funds in other companies (which in turn becomes a subsidiary) and divest the company’s assets, a unit or a subsidiary company to ensure the potential growth of the business and its shareholders.

The most settled cause for parent companies to utilize these corporate methods is to eliminate non-profitable subsidiaries to focus their attention on the profit-making subsidiaries.

Key Takeaways

1. A spin-off is creating an independent company from an existing one by distributing new shares to current shareholders. At the same time, a split-off involves offering shareholders the option to exchange their shares for those of the new company.
2. A split-up occurs when a parent company is dissolved, and its assets are divided among newly formed companies. At the same time, a carve-out involves selling a portion of a subsidiary to the public through an IPO.
3. Spin-offs and split-offs allow parent companies to focus on core operations, while split-ups and carve-outs can raise capital and unlock shareholder value.

Spin-Off vs Split-Off vs Split-Up vs Carve-Out

Spin-offs are the formation of a new independent company from the parent company by distributing the existing company’s shares. In a split-off, the parent company gives the shareholders an option to either maintain the shares they already have or trade them for shares of the divesting company. A split-up occurs when a parent company splits into two or more independent companies. A carve-out is when the parent company sells some of the shares from its subsidiary company to the public.

Key Takeaways

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Comparison Table

Parameter of comparison	Spin-offs	Split-offs	Split-ups	Carve-outs
Meaning	A corporate spin-off refers to a wholly new and separate independent entity created from a parent company. In contrast, the parent company is shut down, and a new entity is formed.	Split-offs are a divestiture scheme where a new enterprise is being formed from the parent company while the parent company continues operating and is not shut.	A split-up is where two or more companies are split up and formed from the parent company once it is dissolved.	A carve-out is where a new entity is created from the parent company, and the shares of the new entity are sold through an initial public offering (IPO).
Shares	Under spin-offs, the shares of the new entity formed by the parent company are sold and distributed to the existing shareholders.	Under split-offs, the shareholders of the company have the option to either hold the shares of the parent company or trade the shares to buy shares of the new enterprise.	Under split-ups, the parent company’s shares may be traded for the shares of the new entity.	Under carve-outs, the shares of the new entity are sold and distributed based on the initial public offering. And no shares are distributed to the existing shareholders.
Purpose	Under spin-offs, a new entity is formed from the parent company, and the new entity has a separate identity.	Split-offs differentiate the transactions between the leading businesses and the new enterprise.	Split-ups primarily aim at creating numerous business lines to earn more profits.	Under carve-outs, the new entity created by the parent company is not considered in achieving the parent company’s main objectives.
Taxable	The method of spin-offs prevents the parent company from paying taxes.	On the other hand, under split-offs, the parent company may not enjoy the benefit of free tax.	The parent company under split-ups are only taxed on the company’s liquidation.	For a carve-out company to be free from paying tax, not more than 20% of the parent company’s stock can be sold by initial public offering.
Benefits to shareholders	Under spin-offs, the existing shareholders can relish the privileges of shares from both the parent company and the new entity.	The split-off companies offer the shareholders a premium after they trade their shares for the shares of the new entity.	The split-up companies do not provide any benefits to the shareholders.	Under carve-outs, the shares are distributed to the general public, and they also initiate a set of shareholders in the new company.

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What is Spin-Off?

Spin-offs is a corporate term that refers to forming a new independent company from a parent company by selling the shares of its existing company to the existing shareholders.

Advantages:

1. Spin-off companies earn large amounts of profit since this business aims to set its goal of achieving the business models. These businesses also aim at attracting new shareholders.
2. The investors show great interest in the spun-off shares since these businesses have an excellent opportunity to excel. Hence, this provides security to the shareholders/investors of the company.
3. The employees seek to explore their individuality and vision. Hence, these enterprises help the employees to do so.
4. A spin-off company has an independent stock price which displays the performance of the company’s administration in the share market.

Disadvantages:

1. Spun-off companies have impacted the company’s costs by causing a rise in the company’s fixed costs like rent, property tax, etc. this increases the cost of the enterprise and is a disadvantage of spin-off companies.
2. As the spun-off company is a new independent entity that is no longer under the parent company’s supervision, it requires many departments and skilled employees to manage their work efficiently and effectively. Hence, spin-off companies require long-term support.
3. The employees of the new spin-off company are not confident about the newly independent company since the company is starting from the beginning, and they doubt the future of the company.

Example:

In 2014, a healthcare (parent) company known as Baxter International Inc formed a new entity called Baxalta Incorporated Inc on July 1^st, 2014. The existing shareholders of Baxter International acquire one share from the stock of Baxalta Incorporated. Baxter International maintains 19.5% ownership stock in Baxalta Incorporated after the spin-off takes place.

 

What is Split-Off?

A split-off is a corporate term where a parent company deprives/divests an entity using specific terms. In a split-off, the parent company gives the shareholders an alternative to maintain the shares they already have or trade them for shares of the divesting/deprived company. In some split-offs, the parent company offers a premium to boost the interest of the stocks in the company.

Advantages:

The benefit of split-offs to the parent company is that they are similar to repurchasing shares, except that cash is not used for the repurchase process. Still, the stock of the subsidiary company is used as a stock buyback. This neutralizes stock dilution.

Example:

On the 17^th of November, 2015, the parent company General Electric engaged itself in a split-off of Synchrony Financial. The CEO of General Electric, Jeffrey Immelt, decided to separate its financial businesses from its main businesses. General Electric gave its existing shareholders a chance to trade every General Electric share for 1.505 shares of Synchrony Electric.

 

What is Split-Up?

A split-up is a corporate term where a parent company splits into two or more independent companies. The stocks in the parent company may be traded for the newly independent companies’ stocks at the investors’ care and caution.

Reasons for Split-ups:

Companies strategically do split-ups to recondition the company operations. These new independent companies may have distinct company lines- where it requires its funds, resources, and personnel.

Split-ups can be an advantage for the investors/ shareholders since managing each division individually would increase the profits of the independent entity. And the merged profits of the split-up companies surpass those of the parent company.

Companies should split up mainly because of the government’s involvement in reducing monopolistic operations. It has been almost a decade since a pure monopoly split was seen in the market. For example, Facebook and Google are a monopoly the government had split up to safeguard the customers’ interests.

Example:

In the year 2015, the Hewlett-Packard company finalized a split-up that ensured the emergence of two concerns- HP Inc, which focused on making PCs, printers, laptops, etc., designed for small and medium-scale businesses and Hewlett-Packard Enterprises, which aimed at selling both hardware and software services to large companies.

The existing shareholders of Hewlett-Packard Company were allowed to buy shares of either one of the two concerns. Shareholders who preferred a more secure steady-going company chose to buy shares from HP Inc. Those who wished to buy shares from a quick-growing entity that would take part in the IT sector chose Hewlett-Packard Enterprises.

 

What is Carve-Out?

A carve-out is a corporate term where the company divides the secondary company from its parent company as a free-standing company. The new organization possesses its board of directors. The care-out is concerned with selling the company and selling and distributing the entity’s equity shares through an initial public offering (IPO). No equity shares are traded or distributed to the existing shareholders.

Advantages:

A carve-out scheme is an advantage for both the parent company and the new entity. As two separate entities are formed out of an old and big company with the primary objective, the new entity aims at focusing on this primary objective for the benefit of both the new entity and the parent company, as they will both end up earning large amounts of profits.

Example:

In 2009, a parent company known as Las Vegas Sands engaged itself in carving out its Sands China subsidiary into a new independent firm to raise $3 billion in cash. According to experts, 64% of most enterprises take part in carve-outs because they require cash or capital for their business.

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Main Differences Between Spin-Off, Split-Off, Split-Up and Carve-Out

Definition:

1. A spin-off company is a new entity formed from a parent company that is created once the parent company dissolves.
2. Split-offs are a divestiture procedure where a company is formed by the parent company when the parent company has not been dissolved.
3. A split-up is created when a parent company forms two or more new companies on the dissolution of the parent company.
4. A carve-out is a company formed from the parent company, and the shares of the company are sold based on an initial public offering.

Distribution of Shares

1. For a spin-off company, the shares of the new firm are given to the existing shareholders.
2. For a split-off company, the shareholders can settle on either the parent company’s or the new entity’s shares.
3. For a split-up company, the shares of the parent company may be exchanged for the shares of the new firm.
4. For a carve-out company, the new company’s shares are traded based on an initial public offering.

Purpose of Existence

1. The purpose of spin-offs is that the new entity created by the parent company has its own separate identity.
2. The purpose of the split-off is that the key objectives of the parent company are different from that of the new firm.
3. The purpose of split-up is mainly to form multiple business lines to increase the profitability and potency of the business.
4. The carve-out company does not aim at obtaining the parent company’s key objectives. However, they aim to achieve their organizational objective.

Tax Treatment

1. The companies that participate in spin-offs do not have to pay any taxes.
2. Under Split-off, the parent companies have to pay taxes.
3. Under split-ups, the company is only taxed after they are liquidated.
4. Under carve-outs for the parent company to be free from paying tax, the company should not sell more than 20% of the stock that can be sold through an initial public offering.

Benefits for Shareholders

1. The benefits of a shareholder under spin-offs are the shareholders relish the share benefits from both the parent and new entity.
2. The advantages given to shareholders under split-offs are a premium is given to the shareholders if and when they trade the shares of the parent company to purchase shares of the new firm.
3. No benefits are provided to the companies’ shareholders participating in split-ups.
4. The benefits offered to shareholders under carve-outs are that the company aims to increase the shareholders’ worth.

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References

1. https://mediatum.ub.tum.de/1145143
2. https://gadingss.learningdistance.org/index.php/gadingss/article/view/53