Divestiture or commonly called as divestment is the process of selling off a part or division of the company to another company or creating a separate company. Divestiture can take the form of the spin-off, split-off, split-up, sell-off, equity carve-out, etc. Of these forms, the two commonly juxtaposed forms of divestiture are spin-off and split-off. Spin-off refers to the business division, which becomes an independent undertaking, after separation from the parent company.
On the contrary, Split-off is a process in which the holding company’s shareholders are allotted shares in the subsidiary, that is being split-off in exchange for the shares in its holding company.
The company adopts the divestiture in order to focus on its key areas or to fulfil urgent cash requirement, or due to the large size of the business, it is difficult to handle, the unit is not generating good revenue. Check out the differences between spin-off and split-off, in the article presented to you.
Content: Spin-off Vs Split-off
|Basis for Comparison||Spin-off||Split-off|
|Meaning||Spin-off implies a business action, wherein a company disjoins a division and creates new business entity, which is separately listed in the stock exchange and has independent board of directors.||Split-off refers to a corporate divestiture process in which a company's subsidiary turnout as a separate entity, with independent listing of its capital stocks.|
|Shares||Shares of the subsidiary company are distributed to all the shareholders.||Holding company's shareholders are required to exchange their shares, to get shares in the subsidiary.|
|Reason||To create a separate identity of the new firm.||To create a distinction between the core business and the new one.|
Definition of Spin-off
A spin-off can be defined as a type of divestiture in which the part of a business is dissociated and created as a separate firm, by issuing new shares. This form of corporate divestiture is also known by the name spin-out or starburst.
The shares are distributed as a dividend to the existing shareholder in the proportion of their holdings, with the aim of compensating the loss of equity in the initial stocks. In this way, ownership is not changed, in the sense that the same stockholders will own the company and that too in the same proportion. Further, the shareholder’s have the choice to retain these shares with themselves, or they can also sell these shares in the market.
Companies go for a spin-off to manage the division that has good potential, especially for the long term. In the spin-off, the parent concern transfers the assets, intellectual property, i.e. copyright, royalty, trademark, etc., and manpower, to the newly affiliated firm.
Definition of Split-off
The term ‘split-off’ is used to mean a method of corporate restructuring, in which the shares of a company’s subsidiary or unit are transferred to the shareholders, in return for the equity of the parent concern. Hence, it is similar to stock repurchase, wherein the parent company buys back its own shares.
Prior to the split-off, the split-off entity is a division or subsidiary of the parent concern, which after split-off becomes a separate legal entity owned by some of the shareholders of the parent organization and ownership of the parent concern will be in the hands of the remaining shareholders, who do not surrender their shares for the shares in the split-off.
Key Differences Between Spin-off and Split-off
The differences between spin-off and split-off are given in detail in the points given below:
- A spin-off can be described as the divestment strategy, in which a portion or division of the company, is split and a new company is created which has a separate legal identity from the parent one. On the other hand, split-off is a corporate restructuring strategy through a contraction, wherein the parent company offers its shareholder the shares of the new entity, who must relinquish the shares of the parent company, on the acceptance of the shares in the new entity.
- In the spin-off, the shares of the spin-off concern will be allotted to the stockholders of the parent concern on pro-rata basis, and they need not give up the shares of the parent concern. On the contrary, in split-off, the allotment of shares will be made to those shareholders only who surrender the shares of the parent concern in exchange for the shares in the split-off concern.
- Corporates take the recourse of spin-off in order to create a separate identity of the subsidiary, whereas split-off is often affected when the company wants to create a difference between its core business activities and the additional one.
Companies that wish to make their operations more efficient and effective, usually sell their unprofitable units or unrelated subsidiary, to concentrate on its core and more profitable operations. And to do so, spin-off and split-off is the best option for the corporates.