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What are the differences between split ups and carve outs?
For effective management of their portfolio to achieve financial goals companies use various divestiture methods like spin-offs, split-ups, carve-outs and split offs. These are commonly used corporate actions to ensure potential growth of both business and shareholders wealth.
Split-ups
As the name suggests, split-ups are nothing but company splitting of parent organizations into two or more independent or separate companies. Stocks of parent organizations may be traded for newly formed companies. There may be many reasons for split-ups, some of them are strategic decisions to recondition their operations, companies need different company lines, in terms of funds, resources etc.
Investors can take advantage of split-ups by managing each division individually and independently. They may increase their profits. Sometimes companies opt for split-ups to reduce monopolistic operations.
Example of split-ups is Hewlett-Packard Company. HP INC will look after laptops, printers, PCs etc. and Packard enterprise will sell both hardware services and software services
Carve outs
Commonly used in corporate, it is the process of dividing a secondary company as a free standing company from its parent company. Now after dividing, the new company has its own board of directors. In this shares are traded, they sell and distribute their share in initial public offering (IPO)
Advantages
The advantages of carve outs are as follows −
Advantage for both parent and newly formed companies (primarily the secondary company).
Now the newly formed company can focus on their solo objective.
Both can earn and spend their own profits.
Differences
The major differences between a split ups and a carve outs are as follows −
| Split ups | Carve outs |
|---|---|
| Parent company split ups to form two or more new companies. | New entity is created from the parent company. |
| Parent company is dissolved. | Shares of the new entity are sold through IPO (initial public offering). |
| Share of the parent company is traded to new companies. | No shares are distributed to existing shareholders |
| Main aim is to create various business lines. | Main aim is to achieve the objectives which are not considered by the parent company. |
| Taxed only on liquidation of the company. | Tax benefits |
| No benefits to shareholders | Less than 20% of parent company stock can be sold through IPO. Shares are issued to the general public. |
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