Investors in the stock market may have heard that different types of divestment are used by companies to increase shareholder value. Companies use two common strategies to achieve this goal: spin off and split-off. The company can choose between either one of these options. What is the difference between spin-off and split off? Continue reading to learn more.
It is essential to understand the differences between spin-off and split-off in order to fully appreciate the concepts.
Let's start with the term "spin off". A spin-off is a strategy that a company uses to create a new business entity. This strategy allows the company to seperate a portion of its operations in order to create a new subsidiary. The new entity then distributes its shares to its existing shareholders.
A company may decide to spin off for a variety of reasons. A company may decide to create a separate entity from one of its most profitable divisions in order to maximize its profits. A spin-off might be an option for the company if it has a profitable division that is not in line with its core competencies. This allows the parent company as well as the division to set their own goals, benchmarks, and milestones but remain closely linked.
The subsidiary is now independent from its parent company and has its own management. The new subsidiary may take with it various assets, such as employees or technologies, at a cost that is agreed to by both sides. The shareholders of the parent company get stock in two companies at the end.
Let's take a closer look into what a split-off means.
A split off looks very similar to a spin-off. Splitting off is a strategy that involves the parent company creating a separate entity to reorganize and divest. The primary difference between a splitting off and a spinoff, however, is that the parent company's shareholders must choose whether to keep their stock in the company or the subsidiary.
Splitting offs are generally designed to provide shareholders with more value. Splitting off means that the parent company transfers part of its assets to the subsidiary for the entirety of its stock capital. Splitting off allows the company to sell its assets and offer a new company for its shareholders.
Now that we've reviewed both concepts, let's take a closer look into the differences between spin-off and split-off in the stock market.
The main difference between a splitoff and a spinoff lies in the distribution of shares and ownership. The shares of the parent company and its new subsidiary are divided among shareholders in the case of a split off. Splitting offs require shareholders to give up their shares of the parent company to receive shares in the subsidiary.
Another difference between a split-off and a spin-off is the utilisation of company resources. The parent company will use its resources to create the new entity in the case of a split-off, whereas this is not true for split-offs.
You will find many instances of spin-offs and split offs in your research on the stock market. Although the difference between them may not be relevant to your current investments right away, it can help you in your future investments.