What Is a Split-Off?

A split-off is a corporate reorganization method in which a parent company divests a business unit using specific structured terms. There can be several methods for structuring a divestiture. Split-offs, spinoffs, and carveouts are a few options, each with its own structuring.

In a split-off, the parent company offers shareholders the option to keep their current shares or exchange them for shares of the divesting company. Shares outstanding are not proportioned on a pro rata basis like in other divestitures. In some split-offs, the parent company may choose 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 fueled by the same motivations of all divestitures in general. The main difference in a split off vs. other divestiture methods is the distribution of shares.

Businesses enacting a split-off must generally follow Internal Revenue practices for a Type D reorganization pursuant to Internal Revenue Code, Sections 368 and 355. Following these codes allow for a tax-free transaction primarily because shares are exchanged which is a tax-free event. In general, a Type D split-off also involves the transferring of assets from the parent company to the newly organized company.

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

A split-off includes the option for current shareholders of the parent company to exchange their shares for new shares in the new company. Shareholders do not have to exchange any shares since there is no proportional pro rata share exchange involved. Oftentimes, the parent company will offer a premium in the exchange of current shares to the newly organized company’s shares to create interest and offer an incentive in the share exchange.

Examples of Split-Offs

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

In each case, the parent company sought to create greater value for shareholders by shedding assets and providing the new company an opportunity to operate independently. In general, it is not always the case that a split-off is mutually beneficial. Viacom split from Blockbuster in 2004 to shed the underperforming and unprofitable division weighing down the balance sheet.

Blockbuster started to feel the pressure from cheaper DVD retailers, digital recording capabilities of traditional cable set-top boxes, and the early rise of video on demand services like Netflix (NFLX). As a result, Viacom announced plans to split off its 81.5% stake in the one-time video rental giant and was even willing to absorb a $1.3 billion charge to do so. Blockbuster tread water for about the next five years until filing for Chapter 11 bankruptcy protection in late 2010.

Key Takeaways

  • Split-offs are a method that can be used for a corporate divestiture.
  • Split-offs do not mandate a proportioned pro rata share distribution but rather offer shareholders the option to exchange shares.
  • Split-offs are motivated by the desire to create greater value for shareholders through the shedding of assets and offering of a new, separate company.