As an investor in the stock market, you may have heard that companies often employ different methods of divestment to provide greater value to their shareholders. Spin-off and split-off are two such common strategies employed by companies to make this possible, and the choice between them is made at the company’s discretion. But what exactly is the difference between split-off and spin-off? Read on to find out.

What is Spin-Off?

To understand the essential differences between spin-off and split-off, it is important to have a complete understanding of the two concepts as well as why they are relevant.

Let us start off with the concept of ‘spin off’. A spin-off is basically a strategy used by a company to create a new business entity. With this strategy, the company essentially separates a part of its operations to establish a new subsidiary and then distributes the shares of this new entity to its current shareholders.

There are various reasons why a company might decide to go ahead with a spin-off. The company might deem it best to establish one of its more profitable divisions as a separate entity in order to overall benefit from its profitability. In the event that the company has a successful division that does not exactly match the company’s core competencies, a spin-off might be a prudent choice for both parties. It allows both the parent company and the division to focus on separate goals, benchmarks, and milestones while still being affiliated with each other.

After the spin-off, the subsidiary becomes distinct from its parent company and acquires its own management. Upon separation, the new subsidiary often takes various assets such as employees and technologies along with it at a particular cost agreed upon by both parties. As for the shareholders of the parent company, at the end of a spin-off, they benefit from having stock in two companies for the price of one.

What is Split-Off?

Next up on the spin-off vs split-off distinction, let us take a closer look at what a split-off means.

On the surface, a split-off appears quite similar to the spin-off. This is because as a strategy, a split-off also involves a parent company establishing a separate entity as a means of reorganisation and divestiture. However, the primary difference between a split-off and a spin-off is that at the end of a split-off, the shareholders of the parent company have to choose between keeping stocks either in the company or its subsidiary.

The motivation behind split-offs is generally to offer more value to shareholders. This is because, in a split-off, the parent company essentially transfers a portion of its assets to the subsidiary in exchange for its entire stock capital. Through a split-off, therefore, the company is able to shed its assets while offering a new company to its existing shareholders.

What are the differences between spin-off and split-off?

So now that we have reviewed the two concepts in question, let us take a closer look at the differences between a spin-off and split-off in the share market.

The primary difference between a split-off and a spinoff is that of share distribution and ownership. In the case of a spin-off, the shares of both the parent company as well as its new subsidiary are distributed among shareholders. However, with split-offs, shareholders are required to relinquish the ownership of their parent company shares in order to be allocated shares in the subsidiary.

The other difference between a split-off and a spin-off is that of company resources utilisation. In the case of a spin-off, the parent company uses up its own resources to set up the new entity whereas in split-offs, this is not the case.

Conclusion

In your time spent researching the stock market, you are certain to find old and new instances of spin-offs vs split-offs with respect to major players in the market. While the distinction between them might not be immediately relevant to your current investments, keeping these concepts in mind can help you with your future investments.