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What are the differences between spin offs and split ups?
Divestitures are commonly used words for effective management of company portfolio and to achieve financial goals. There are different methods in divestiture, commonly used are spin-offs, care-outs, split-offs and split-ups.
Spin-offs
It is the term used for newly formed independent companies which are formed from parent companies. In these spin-offs the parent company sells their existing shares to its existing shareholders.
Advantages
The advantages of spin-offs are as follows −
Using spin-off methods companies can increase their profits. They can attract new shareholders.
They can set and achieve their own goals by following their business models.
Provides security to shareholders.
Employees can explore their individuality and vision.
Newly formed company now has an independent stock price.
Disadvantages
The disadvantages of spin-offs are as follows −
At initial stages, the cost to the company will increase.
Newly formed companies may not always have skilled employee, experienced management. So it requires long term support.
Sometimes employees may not feel secure about their jobs as they are in the parent company.
Split-ups
If the parent company split into more independent companies then that process is called as split-ups. Shares of the parent company may trade to newly formed companies with caution of investors.
There may be various reasons to split-ups, come of them are as follows −
Sometimes companies go for split-ups to recondition their operations. Different operations need different funds, employees and resources.
Investors may get more profits in newly formed independent companies than in merged companies.
Companies can reduce their monopolistic operations.
Differences
The major differences between a spin off and a split up are as follows −
| Spin offs | Split ups |
|---|---|
| Shares of the parent company are sold to create a new entity. | Parent company split ups to form two or more new companies. |
| Increase profits by focusing on a particular sector. | Parent company is dissolved. |
| Inherits assets and management structure of parent company. | Share of the parent company is traded to new companies |
| Main drawback is, this process increases cost. | Main aim is to create various business lines. |
| Example: Ebay & PayPal. | Taxed only on liquidation of the company. No benefits to shareholders. |
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