Definition
A spin-off in finance involves a parent company creating an independent company by distributing all shares of a subsidiary to its existing shareholders. It’s a type of divestiture where the new company takes assets, employees, or technology from the parent company. On the other hand, a split-off is when a parent company’s shareholders are given shares of a subsidiary in exchange for their parent company shares, essentially separating the two entities.
Key Takeaways
- Spin off and Split off are both corporate restructuring strategies. In a spin-off, a parent company distributes all of its ownership interest in a subsidiary to its shareholders, whereas in a split-off, a parent company offers its shareholders the opportunity to exchange their shares in the parent company for shares in one of its subsidiaries.
- With a spin-off, all shareholders proportionally receive shares of the new entity and still maintain their shares of the original company. However, in a split-off, shareholders must choose between maintaining their shares in the parent company or trading them for shares in the subsidiary. Therefore, spin-offs affect all shareholders equally, while split-offs end up creating a group of shareholders that are different from the parent company.
- The impact on the stock price also differs. After a spin-off, the price of the parent company’s stock usually decreases because the subsidiary was contributing to the earnings of the parent company. However, with a split-off, the parent company’s stock price might not be affected as much as in a spin-off since only a subset of the parent company’s shareholders will receive shares in the subsidiary.
Importance
The finance terms “spin off” and “split off” represent two distinct mechanisms for corporate restructuring that are utilized by companies for various strategic purposes, making them important concepts in the field of finance.
A spin-off refers to when a parent firm creates a new, independent company by separating a subsidiary or division, with the shares being distributed proportionately among existing shareholders.
A split-off, however, involves the exchange of shares between the parent company and the shareholders, where shareholders get shares in the subsidiary in exchange for giving up shares in the parent company.
Understanding these two methods is critical as they have different impacts on the company’s financial structure, shareholders’ equity, and overall market performance.
The choice between spin-off and split-off can greatly influence the future trajectory and success of both the parent company and the newly formed entity.
Explanation
Spin-off and Split-off are financial terms commonly used in business restructuring. A spin-off is a strategic move where a parent company decides to create a new, independent entity by divesting a business unit or subsidiary. A principal purpose of a spin-off is to allow the newfound entity to focus more precisely on its specific business operations which can likely increase the valuation of both the parent company and the spin-off.
It also attracts investors as the spin-off companies invite potential growth. Companies contemplating such a strategic move typically believe that the spin-off would be worth more individually than as a part of the overall business entity. On the contrary, a split-off involves shareholders where a parent company offers its shareholders the option to give up shares in the parent company in exchange for shares in the business unit being split off.
Its primary purpose is to separate a subsidiary or business unit from its parent company, but it involves a direct exchange of shares between the parent corporation and its shareholders. It’s often used to rid of a non-core business unit that may have been dragging down a parent company’s valuation. Unlike a spin-off, a split-off may reduce the number of shareholders in the parent company since they’re offered a choice to transition to the new entity.
In both scenarios, spin-offs and split-offs allow parent companies to streamline their operations and bring more focus to their core businesses.
Examples of Spin off vs Split Off
Spin-Off: PayPal from eBay (2015)eBay in 2015 spun off PayPal into a separate publicly-traded company, allowing each company to focus on its respective market business. eBay was interested in focusing on its online marketplace, while PayPal wanted to cement its position in the digital payment industry. After the spin-off, PayPal rapidly grew and soon became worth more than eBay itself.
Split-Off: Kraft from Altria (2007)In 2007, Altria Group Inc., previously known as Philip Morris Companies Inc., split off its subsidiary Kraft Foods Inc. Altria Group realized that tobacco and food were separate entities and needed independent operation control. Therefore, Altria released its ownership in Kraft, giving Kraft shareholders an option to exchange their Altria shares for Kraft shares. With this, Kraft completely separated from Altria, allowing both to operate in their individual industries without the shadow of the other.
Spin-Off: Motorola Mobility from Motorola Inc (2011)Motorola Inc in 2011 spun off their mobile device and home business into a separate company called Motorola Mobility. This allowed Motorola Inc to focus on providing communication services in government and enterprise sectors. In the same year, Motorola Mobility was acquired by Google, which would later sell it to Lenovo. This is a good example of how a spin-off can create a more attractive acquisition target.
FAQs: Spin off vs Split Off
What is a spin off?
A spin off is a type of corporate reorganization, where a company creates a new independent company by separating a section of its own business. The parent company generally retains control over the new company and the existing shareholders receive equivalent shares in the new entity.
What is a split off?
A split off is another form of corporate reorganization. In a split off, a parent company offers its shareholders the opportunity to exchange their shares in the parent company for shares in a subsidiary. Unlike in a spin off, shareholders must choose between keeping their shares in the parent company or accepting shares in the new entity. The parent company does not necessarily retain control over the subsidiary post split-off.
What is the difference between a spin off and a split off?
The main differences lie in the way shares are handled and the level of involvment of the parent company post reorganization. In a spin off, the parent company directly creates a new company and gives shareholders an equivalent interest in both entities. They retain control of the new entity. However, in a split off, shareholders have to make a choice between owning shares in the parent company or the new entity and the parent company does not always retain control over the subsidiary.
Which one is better: spin off or split off?
The choice between a spin off and a split off depends on the specific circumstances and goals of the parent company and its shareholders. Both can be employed as strategies to increase shareholder value, deal with regulatory issues, or encourage more focused management. However, they involve different levels of risk, decision-making requirements for shareholders, and impacts on ownership structure.
Related Entrepreneurship Terms
- Parent Company: The initial and main corporation that owns enough voting stock in another firm to control management and operations.
- Subsidiary: A company whose majority of shares (more than 50%) are owned by the parent company.
- Equity Carve-out: A method of creating a spin-off by selling a percentage of the subsidiary to public shareholders.
- Distribution Ratio: An important concept in split off that determines the number of shares an existing shareholder will receive.
- Tax-free Reorganization: In certain circumstances, both spin-offs and split-offs may be completed as a tax-free reorganization.
