When companies divest themselves of certain assets, they can do so in several ways. It is vital that you know the difference between these different methods, as they all have their own distinct advantages. So, what does it mean to spin-off, split off, or carve out a set of assets from your company?
In this method, shares are spun off and distributed to shareholders according to a pro-rata basis. As a result of this, shareholders are able to have shares in two companies, and enjoy all the benefits that come from that. How much is spun off and what the division between the shareholders looks like will differ from case to case.
One of the biggest benefits to this method is the fact that it can be tax-free so long as certain provisions in Internal Revenue Code 355 are met. If you are looking to protect your assets from taxation, this can be of great service.
By contrast, a split-off differs insofar as where a spin-off allows shareholders to hold shares in two different companies, both the parent company as well as the new subsidiary, a split-off forces them to choose between the two. As a result, there is no pro rata, as is the case with a spin-off. Oftentimes, the value of the subsidiary might be a bit higher than that of the parent company, though as a consequence of its newness, it may be less predictable.
Finally, let’s come to carve-outs.
These involve a company selling off its shares in its subsidiary to shareholders via a public offering. An important point of distinction between this and the spin-off approach to subsidiaries is that in this option, the company is typically able to get a cash flow from this method. This option often comes before a spin-off.
These different methods of splitting and spinning off shares for shareholders can be quite beneficial when applied in the proper circumstances. By knowing what each of these options entail, you’ll be prepared to handle your next public offering.