Bifurcation

What Is Bifurcation?

Bifurcation is the splitting of a larger whole or main body into two smaller and separate units. Bifurcation can occur when one company divides into two separate divisions, thereby creating two new companies that can each sell or issue shares to stockholders. Companies may seek bifurcation for certain tax advantages.

How Bifurcation Works

Although it has applications across several fields of study, bifurcation in the financial world usually describes either the breaking of a larger entity into smaller divisions. If a company decides to bifurcate and break into two separate companies, shareholders in the initial company are given shares of the new company through a corporate reorganization.

A company might break off a division because the division has its own revenue stream or a business plan that's different from the main company. Companies also bifurcate because they can raise more capital. For example, a food company that sells many products might bifurcate the product lines into two companies so that the new company can obtain its own financing through the issue of equity shares.

Potential Benefits

Shareholders could also benefit from the break up since the new shares might rise at a faster rate than the shares of the combined entity. As a result, bifurcation of publicly traded companies often involves the opportunity for shareholders to make money on stock price appreciation.

However, a company might also break off part of the company because it's unprofitable. A company might break up or bifurcate with the goal of selling one of the entities and using the funds to reinvest in the surviving company.

Bifurcation in Context

The term bifurcation has other applications in law, hydrology, fluid dynamics, mathematics, economics, chemistry, anatomy, and physiology. In each application, bifurcation refers to the splitting in two of a certain element or system, such as the splitting of a single hydrogen atom participates into two hydrogen bonds.

Market bifurcation happens when disjointed market movements, such as growth and value investments, move in different directions, or when high-quality and low-quality securities move out of sync, causing one to perform much better than another.

Real-World Example of Bifurcation

In early 2019, the clothing retailer Gap Inc. (GAP) announced it would break up and bifurcate the Old Navy brand from the Gap stores as reported by CNN. Now, Old Navy would be a stand-alone company while the original Gap stores along with Banana Republic, Athleta, and Hill City will be one company, which they're calling the NewCo since a name has yet to be chosen.

Old Navy generated $8 billion in sales by itself, while the Gap and the remaining stores combined for $9 billion in revenue in 2018. Senior executives noted that the bifurcation would allow or free up Old Navy to expand and grow with a separate business strategy. The NewCo, which includes the Gap, can pursue a different business strategy and possibly consolidate the remaining companies into one retailer.

Time will tell if the bifurcation of Gap Inc. and Old Navy will make financial sense, but the companies have had divergent financial performances in recent years as the Gap brand has struggled while Old Navy has continued to grow.