What is a Split-Off
A split-off is a method of reorganizing an existing corporate structure where shares of a business division, subsidiary or newly affiliated company are transferred to stockholders in exchange for stocks of the parent company. A company will pursue a split-off when it wishes to create a distinction between the core business and new brand.
Some popular examples of split-offs throughout history include Viacom (VIAB) parting ways with Blockbuster in the early 2000s, and eBay (EBAY) turning PayPal (PYPL) public in 2014. In each case, the parent company aims to create greater value for shareholders by shedding toxic assets (Blockbuster) or providing promising companies an opportunity to operate independently (PayPal).
BREAKING DOWN Split-Off
A split-off can offer benefits to both the parent company and subsidiary. The eBay and PayPal separation has created greater value for shareholders of both companies. PayPal was given an opportunity to lead the payment sector with cutting-edge technology and mobile initiatives. Conversely, eBay began to experience the same fundamental upside from the early 2000s when it was a leader in the retail space.
It's 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 pinch 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 of 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.
The benefit of a split-off for the parent company is akin to a stock buyback. Instead of purchasing stocks in cash, the larger corporation uses shares of the subsidiary company to reduce outstanding shares. Since shareholders of the parent company can choose whether to partake in the split-off, distribution of subsidiary shares is not done pro rata as it is in a spinoff.
How to Accomplish a "Split-Off"
Split-offs are normally accomplished when shares of the subsidiary have been sold in an initial public offering (IPO) through a carve-out; meaning the subsidiary already has a specified market value. The parent company can then determine a specific ratio it will exchange shares of the two firms. Investors will usually receive more valuable shares in the subsidiary company as an incentive to exchanges shares of the parent company.