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What are the difference between split ups and split offs?
Divestiture is also called as divestment which is used by corporations for disposal of their business unit with intention to focus on more profitable units. Some companies had difficulties in managing some of their business units, some going for growth trajectory are some of the reasons why companies use divestitures.
Split-offs and splits-ups are methods used by corporations for their divestment.
Split-off
In a split-off parent company splits some of their assets and forms a subsidiary company with their split assets. Shareholders of the parent company will have an opportunity to exchange shares (if they want) of the parent company to the newly formed company. If they don’t want to exchange their shares they can retain it with the parent company.
To raise funds, sometimes the parent company offers attractive offers to shareholders. The distribution of shares by this method is unique. In a few countries, shareholders are taxed for redemption of their shares.
Split-off helps newly formed companies to operate independently and to attract shareholders. The parent company provides maximum assets to the new company. Parent company shows expenses by split off and gets tax evasions under various clauses.
Split-up
In a split-up, the parent company will split into two or more new entities. These newly formed entities operate independently. In this also, shareholders will get an offer to exchange to the parent company and they are taxed based on liquidation.
The main reason to split-up is to explore or operate in a new profitable business. This also avoids monopolistic practices. The main advantage of this method is, it offers diversification of business. Profits generated after a split-up attract shareholders (either new or existing) and increase in their share price.
Differences
The major differences between a split up and a split off are as follows −
| Split ups | Split offs |
|---|---|
| Parent company split ups to form two or more new companies. | New entity is formed from the parent company. |
| Parent company is dissolved. | Parent company is not shut. |
| Share of the parent company is traded to new companies. | Shareholders can opt to hold the shares in the parent company or trade their shares to a new entity. |
| Main aim is to create various business lines. | Transactions of parent company and new entity are differentiated. |
| Taxed only on liquidation of the company. | Parent company can’t enjoy the tax benefits. |
| No benefits to shareholders. | Premium is offered to the shareholders, after they traded their shares to a new entity. |
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