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What are the differences between spin off and divestiture?
Business faces some challenges and they need various plans to improve their financial conditions. Challenges may relate to cash, less profits, debts etc. to improve their financial conditions they need to sell their assets.
Spin off and divestitures are two such procedures that help business. People sometimes confuse terms like selling and distributing but they differ with their objectives and principles.
Spin off
A new company is created by selling some of parent company shares is called spinoff. This newly formed company has its own management and rules and technical support will be given by the parent company, if needed.
Based on the need and reason the company will work on a profitable unit and make it independent. This unit may produce more units than before. Some of the major drawbacks are cost handling (cost related to rent, maintenance, tax etc.).
To stand on its feet, the newly formed unit needs a proper operational unit, management and marketing unit. Sometimes it brings some discomfort among employees because it is not as strong as the parent company. Example of a spinoff is the creation of eBay from PayPal.
Divestiture
If the company disposes of some part of their assets then, it is called as Divestitures. The reasons may be different, but common reasons are to focus on different product lines and departments which are hard to manage.
Some of the advantages of divestitures are it can save businesses from bankruptcy. Some businesses have several branches in several locations. Each location may not produce the same profits. Diversification of these assets really helps the business.
These reasons are taken into consideration while going for divestiture. Some other reasons like analyzing product lifecycle. So divestiture is a good strategy but decisions should be taken at an appropriate time.
Differences
The major differences between a spinoff and a divestiture are as follows −
| Spin off | Divestiture |
|---|---|
| Shares of the parent company are sold to create a new entity. | Business assets are sold due to many reasons. |
| Increase profits by focusing on a particular sector. | Debts paid, cash in hand, focusing on important product lines. |
| Inherits assets and management structure of parent company. | Company has no further inheritance on the asset. |
| Main drawback is, this process increases cost. | Main drawback is decision making without proper advice. |
| Example: Ebay & PayPal. | Example: Thomson Returns sold their assets to reduce their costs. |
Conclusion
Working with a financial professional once in a while helps to understand the current business stand and which strategy is followed. It also helps in deciding whether to go for spin off or divestiture. But before going for any process, one should have a clear idea in mind and a decision should be taken in desperation because it may lead to unpreventable losses.
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