Definitions and explanations
Spin-off:
Spin-off is one of the methods used by the companies to divest certain assets, division or a subsidiary. In a spin-off, the parent company distributes the shares of spun-off concern to the existing shareholders of parent company on pro-rata basis and the shareholders are not required to give up the shares of the parent company. Spin-off takes place when parent company contributes assets to a newly formed controlled corporation whose shares are issued to existing shareholders of the parent company on pro rata basis.
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.
Philip Morris International was separated from its parent company, Altria Group. Prior to the spin-off, Philip Morris was a wholly owned subsidiary of Altria until Altria distributed all the shares of the subsidiary company. After spin-off, Philip Morris International was able to create a separate identity of its own and created more value for its shareholders.
Split-off
Split-off is another divestment strategy where the parent company offers its shareholders the share of a new company but the shareholders can only undertake this offer if the shareholders agree to relinquish the shares of parent company. Split off are generally used to restructure a corporate structure. The shareholders are required to give up their existing shareholding in the parent company if they want to acquire shares in the newly formed company.
Prior to the completion of 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 who agree to surrender their shareholding in parent company. The ownership of the parent concern will be in the hands of the remaining shareholders who do not surrender their shares in parent concern for the shares in the split-off.
In October 1998, Du Pont the largest chemical producer in U.S disposed its remaining 70% stake in the Conoco Inc. the Houston based oil company. DuPont disposed its remaining 70 percent stake in Conoco Inc. through a stock swap with the existing shareholders of the DuPont. The share exchange ratio was one share of DuPont in exchange of 2.95 shares of Conoco. Du Pont was able to focus more on chemical business after the split off resulting in better operational and financial results.
Difference between spin-off and split-off
The key points of difference between spin-off and split-off are enumerated below:
Distribution of shares
In a spin-off, the parent company distributes the shares of the spun off concern to its existing shareholder on pro rata basis whereas in a split-off arrangement the parent company offer shares of split-off concern to its existing shareholders but only at the disposal of the existing shares in the parent company.
Holding of shares of shareholders
In a spin-off arrangement the existing shareholders benefit by holding shares of two separate companies after the spin-off instead of one whereas in a split-off arrangement, the existing shareholder has the choice to hold shares in only one company i.e., either in parent company or its split-off concern.
Separate entity and business operations
The parent company undertakes spin-off arrangement in order to create a separate identity of the spun-off concern whereas a split-off arrangement is undertaken when parent company wants to create a difference between its core business activities and the additional one.
Spin-off versus split-off – tabular comparison
A tabular comparison of spin-off and split-off is given below:
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| Meaning and concept | ||||
| A Spin-off arrangement is a divestment strategy in which the assets of the parent company are contributed towards the formation of a new controlled entity and the shares of spun off concern are allotted to existing shareholders on pro rata basis. | A split-off arrangement is a divestment strategy in which the assets of the parent company are contributed towards the formation of a new controlled entity and the shares of split off concern are offered to shareholders of parent company only in exchange of shares of parent company. | |||
| Separation of entity and business operations | ||||
| The parent company undertakes spin off arrangement in order to create a separate identity of the new concern. | The parent company undertakes split off arrangement in order to create a difference between its core business activities and the additional one. | |||
| Shareholders’ option | ||||
| The shareholders of parent company have no option in spin-off arrangement but to accept the shares in spun-off concern. | The shareholders of parent company have the option in split-off arrangement to either continue with the ownership of parent company or to accept shares of the new company. | |||
| Option of shareholding in one or two companies | ||||
| The shareholders of parent company enjoys the ownership in two companies in spin off arrangement. | The shareholders of parent company can only own shares in a single company in a split-off arrangement. | |||
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 corporate. A Spin off arrangement is a better option when a company wants to create a separate identity of the spun-off concern where as a split off concern is a better option when a company wants to create a difference between its core business activities and the additional one.
