Difference Between Spin-Off, Split-Off, Split-Up and Carve-Out (With Table)

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

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) usually adopt when they purchase or hold funds in other companies (which in turn becomes a subsidiary) and divests 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 get rid of non-profitable subsidiaries to focus their attention on the profit-making subsidiaries.

The differences between the divestiture methods- spin-off, split-off, split-up, and carve-outs are as follows:

Spin-offs are the formation of a fresh independent company from the parent company by distributing the shares of the existing company. 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 takes place when a parent company splits up 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.


 

Comparison Table Between Spin-Off, Split-Off, Split-Up and Carve-Out (in Tabular Form)

Parameter of comparisonSpin-offsSplit-offsSplit-upsCarve-outs
MeaningA corporate spin-off refers to a completely new and separate independent entity that is created from a parent company while the parent company is shut and a new entity is formed.Split-offs is a divestiture scheme where a new enterprise is being formed from the parent company while the parent company continues to be 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).
SharesUnder 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 an 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 shares of the parent company 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.
PurposeUnder spin-offs a new entity is formed from the parent company and the new entity has a separate identity for itself.Split-offs differentiate the transactions between the main 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.
TaxableThe method of spin-offs prevent 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 liquidation of the company.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 shareholdersUnder spin-offs the existing shareholders can relish the privileges of shares from both the parent company and 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 kind of 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.

 

What is Spin-Off?

Spin-offs is a corporate term that refers to the formation of 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 the aim of this business is to set its goal on achieving the business models. These businesses also aim at attracting new shareholders.
  2. The investors show a great deal of interest in the spun-off shares since these businesses have a great opportunity to excel. Hence, this provides security to the shareholders/investors of the company.
  3. The employees seek on exploring 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 administration of the company in the share market.

Disadvantages:

  1. Spun-off companies have had an impact on the costs of the company by causing a rise in the fixed costs of the company 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 supervision of the parent company it requires a lot of 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 the year 2014, a healthcare (parent) company known as Baxter International Inc formed a new entity called Baxalta Incorporated Inc on July 1st, 2014. The existing shareholders of Baxter International acquires one share from the stock of Baxalta Incorporated. Baxter International maintains 19.5% ownership stock in Baxalta Incorporated after the spin-off takes place.

Spin Off
 

What is Split-Off?

A split-off is a corporate term where a parent company deprives/divests an entity using certain 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 a premium is offered by the parent company to boost the interest of the stocks in the company.

Advantages:

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

Example:

On the 17th 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 presented its existing shareholders with a chance to trade every General Electric share for 1.505 shares of Synchrony Electric.

Split Off
 

What is Split-Up?

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

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Reasons for Split-ups:

Split-ups are strategically done by companies 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 ought to split up mainly because of the involvement of the government to reduce the monopolistic operations. It has almost been a decade ago since a pure monopoly split up was seen in the market. For example: Facebook and Google are a monopoly that the government had split up to safeguard the interest of the customers.

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 PC’s, 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 and those shareholders who wished to buy shares from a quick-growing entity that would take part in the IT sector chose Hewlett-Packard Enterprises.

Split Up
Split-UP. In a split-up the entire firm is broken up in series of spin-offs, so that the parent company no longer exists and only the new off springs survive. A split-up involves the creation of a new class of stock for each of the parent’s operating subsidiaries, paying current shareholders a dividend of each new class of stock, and then dissolving the parent company. Shareholders of Company A will get shares of. Shareholders of Company A. A. A. B. C. D. E. B. C. D. E. Subsidiary Companies of A.
 

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 not only concerned with selling the company but also selling and distributing the equity shares of the entity through the means of initial public offering (IPO). No equity shares are traded or distributed to the existing shareholders.

Advantages:

A carve-out scheme usually turns out to be 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 main objective the new entity aims at focusing on this main 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 the year 2009, a parent company known as Las Vegas Sands engaged itself in a carve-out of 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 either because they require cash or capital for their business.

carve out

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 is 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 are allowed to settle on either the shares of the parent company or the shares of the new entity.
  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 shares of the new company 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 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 at achieving 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 kind of benefits are provided to the shareholders of the companies that have taken part in split-ups.
  4. The benefits offered to shareholders under carve-outs are that the company aims at increasing the worth of the shareholders.


 

Conclusion

Habitually, business owners presume that forming businesses as a corporation can be too expensive or too time-consuming but both of these thoughts are untrue. On the contrary, businessmen seem to achieve a great deal when they tend to form their businesses as a corporation rather than any other form of business organization, and these benefits often overpowers the disadvantages a corporation might have to face.

The connection between the parent company and the subsidiary company is initiated when one company owns or maintains control over the other company. A single parent corporation can maintain multiple subsidiary firms.

Therefore, at times when the parent companies require productive and well-organized work performance, they consider selling the subsidiaries which are unrelated or un-profitable to the main business to focus its attention on other fresh profitable concerns. In such situations, divestiture is the most suitable option.

Divestiture is the art of trading or dissolving business assets/concerns for monetary, constitutional, and statutory causes. Divesting is significant to a company because it helps minimize liability, boost the profit of the shareholders and helps a company emphasize on re-structuring its stability and growth.

In the above article, the four divestiture methods, i.e, split-offs, spin-offs, split-ups, and carve-outs have been compared with each other to give a glimpse of each of their meanings, advantages as well as their drawbacks to provide the readers sufficient information necessary for them to settle on the most effective alternative among the four divestiture options.

It not only highlights on how these different methods help the company divest their assets or subsidiary companies but also emphasizes on how their ultimate objective helps shareholders increase their profit.


 

Word Cloud for Difference Between Spin-Off, Split-Off, Split-Up and Carve-Out

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

Difference between spin offs split offs split ups and carve outs

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