Split-Off

What Is a Split-Off?

A split-off is a corporate reorganization method where a parent company strips a business unit utilizing specific structured terms. There can be several methods for organizing a divestiture. Split-offs, spinoffs, and carveouts are a couple of options, each with its own organizing.

In a split-off, the parent company offers shareholders the option to keep their current shares or exchange them for shares of the stripping company. Shares outstanding are not proportioned on a pro rata basis like in different divestitures. In some split-offs, the parent company might decide to offer a premium for the exchange of shares to promote interest in shares of the new company.

Understanding Split-Offs

A split-off is a type of business reorganization method that is filled by similar inspirations of all divestitures overall. The principal difference in a split off versus other divestiture methods is the distribution of shares.

Businesses establishing a split-off must generally follow Internal Revenue rehearses for a Type D reorganization as per Internal Revenue Code, Sections 368 and 355. Following these codes consider a tax-free transaction essentially in light of the fact that shares are exchanged which is a tax-free event. As a general rule, a Type D split-off likewise includes the transferring of assets from the parent company to the recently organized company.

Split-offs are generally portrayed as a Type D reorganization which expects adherence to Internal Revenue Code, Sections 368 and 355.

A split-off incorporates the option for current shareholders of the parent company to exchange their shares for new shares in the new company. Shareholders need to exchange no shares since there is no proportional pro rata share exchange included. Oftentimes, the parent company will offer a premium in the exchange of current shares to the recently organized company's shares to make interest and offer an incentive in the share exchange.

Instances of Split-Offs

Split-offs are not generally as common as spinoffs where a pro rata proportion of shares is settled on by the parent company. Three historic instances of split-offs incorporate the following:

• The Fortive Split-Off (in stripping its Automation and Specialty Business)
• CBS Corporation's Divestiture of CBS Radio
• The Viacom-Blockbuster Split-Off

In each case, the parent company looked to make greater value for shareholders by shedding assets and providing the new company an opportunity to freely operate. As a general rule, it isn't generally the case that a split-off is mutually beneficial. Viacom split from Blockbuster in 2004 to shed the failing to meet expectations and unprofitable division burdening the balance sheet.

Blockbuster began to feel the pressure from less expensive DVD retailers, digital recording capacities of traditional cable set-top boxes, and the early rise of video on demand services like Netflix (NFLX). Subsequently, Viacom announced plans to split off its 81.5% stake in the one-time video rental goliath and was even able to retain a $1.3 billion charge to do as such. Blockbuster float for about the next five years until filing for Chapter 11 bankruptcy protection in late 2010.

Features

• Split-offs don't order a proportioned pro rata share distribution but instead offer shareholders the option to exchange shares.
• Split-offs are persuaded by the longing to make greater value for shareholders through the shedding of assets and offering of a new, separate company.
• Split-offs are a method that can be utilized for a corporate divestiture.