When a corporate parent creates an independent company and divests it by distributing to its stockholders new shares in the business it is called?

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

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

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.

It is a strategy to defend the subsidiary company, against the hostile takeovers, as well as it benefits both the holding company, its subsidiary, which goes for split-off.

The differences between spin-off and split-off are given in detail in the points given below:

1. 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.
2. 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.
3. 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.

Conclusion

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.