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What is split in divestiture?
A split is the process of dividing a company into two or more legal units. Its main aim is to maximize profitability by eliminating the stagnant units.
The splits are divided into the following −
Split ups
Company is divided into two or more entities, where the parent company loses its existence. In merger and acquisition, split up are corporate actions, where a company is split or divided into more than one company. These companies are independent and they have separate administrations. Share of the parent company is exchanged between newly formed independent companies.
Some of the reasons for split ups are as follows −
Government mandate − Governments interfere in company activities and minimize monopolistic practices in the market. An example of a government mandate is Google and Facebook.
Strategic advantage − Companies do split-ups in order to restructure their operations. To increase their resources, capital financing etc.
Split offs
It is a process where the parent company transfers the part of assets to its subsidiary as a part of stock owned by shareholders in exchange for controlling stock of the subsidiary.
It restructures the capital structure of a company.
Split off is similar to stock repurchase. In a split off, the shareholders get new stocks in the subsidiary company by trading their shares in the parent company. Split off is characterized in TYPE D reorganization, internal revenue code 355 and 368.
Split ups and split offs differ in many aspects
Term split up is used when a parent company splits into more than one independent company whereas split off is a corporate method, where the parent company transfers some of its units and forms a subsidiary unit with transferred units.
In split ups, liquidation of old stocks allows shareholders to exchange in newly formed independent units. Split off does not allow it.
Reason for the split up is to create a new profitable business whereas the split off is used to acquire substantial market share.
In split ups, there are no benefits offered to shareholders of the new entity whereas in split off, benefits are offered to shareholders.
In split ups, shareholders are taxed for liquidation (in countries where split ups are taxable), whereas a split off attracts tax redemption.
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