Managing different businesses is never easy for companies. That is why they often opt for divestment or divestiture. It is a phenomenon through which a large company breaks up into multiple subsidiaries.
A company may also take the route of divestment to address financial or liquidity issues, emerge out of an unwanted merger or acquisition, or gain tax advantages.
Whatever the reason, divestment provides great value to a company’s shareholders. It’s because when a company splits, its shares also get split and are distributed among the existing shareholders. Spin-off, split-off, split-up, and carve-out are the various strategies through which firms distribute the stocks of their subsidiaries.
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This article discusses the differences between the first two divestment strategies – spin-off and split-off. Continue reading to find out.
Let’s start by discussing the spin-off strategy. In this strategy, a parent company splits into two separate firms. And then, the shares of the new company are distributed to the existing shareholders on a pro-rata basis.
After a spin-off, the subsidiary company becomes an independent business entity and acquires a dedicated management team. It has nothing to do with the parent company. Once the separation is successful, the new company receives certain assets from the parent company, including employees, equipment, office space, etc., as agreed before the divestment.
The shareholders of the parent company, after the completion of the spin-off, benefit by having the shares of two companies without paying anything extra. The subsidiary shares are provided to them as a special dividend.
There are several reasons why companies choose the spin-off strategy. For instance, when the parent company’s management team feels it’s best to establish a separate company to handle a profitable business sector. A spin-off can also help a company come out of a merger or acquisition where the requirements of the acquired company do not match the parent company’s core competencies.
Now that you know about the spin-off, let’s discuss the split-off strategy. Although the two techniques seem very similar, they have some stark differences. Like the spin-off strategy, the split-off involves a parent company splitting into two separate companies and the subsidiary company acquiring a dedicated management team.
However, the difference here is that once the split-off is complete, the parent company’s shareholders are not allotted the shares of the subsidiary company as a special dividend. Instead, they are offered a choice to either keep the shares of the parent company or the subsidiary company.
The benefit of the split-off strategy is that it allows the parent company to transfer a portion of its assets to the subsidiary company in exchange for the stock capital. This strategy also prevents share dilution.
Now that you know the meaning of the two concepts, let’s delve into their differences. The primary difference between the spin-off and the split-off strategies is based on the share distribution and ownership method. In the case of the spin-off, the shares of the subsidiary company are distributed to the existing shareholders on a pro-rata basis in the form of special dividends. And they become the owner of shares of both the parent company and the subsidiary.
However, in the case of a split-off, the shareholders have to choose between keeping the shares of the parent company or the subsidiary. If they want the stocks of both companies, they will have to pay additional cash.
Another difference between spin-off and split-off is based on utilizing the parent company’s resources. In the case of a spin-off, the parent company uses its resources as per the pre-separation agreement to set up the subsidiary company. But in the case of a split-off, the parent company transfers its assets to the subsidiary only upon the exchange of share capital.
Lastly, spin-off results in the dilution of shares, but the split-off doesn’t. Moreover, the value of the stocks may or may not change after the split-off.
Spin-off and split-off are the two popular strategies used to divest large companies. By understanding these concepts and their differences, you can make better investing decisions in the future. If you need a Demat account to invest in shares, you can open it for free with Motilal Oswal. You can also enjoy a host of exciting features and benefits.