What Is a Split-Up?

A split-up is a corporate action in which a single company splits into two or more separately run companies. Shares of the original company are exchanged for shares in the new entity or entities, with the exact distribution of shares depending on each situation. This is an effective way to break up a company into two or more independent companies.

Understanding Split-Up

A company can split up for many reasons, but it typically happens for strategic reasons or because the government mandates it. Some companies could have a broad range of business lines, often unrelated in terms of resources such as capital and management needed to run them successfully. It can be much more beneficial to shareholders to split up the company so that each segment can be managed independently to maximize profits. The government can also force the splitting up of a company, usually due to concerns over monopolistic practices. In this situation, it is mandatory that each segment of a company that is split up be completely independent of the others, effectively ending the monopoly.

It has been a long time since the market has seen a pure monopoly break-up. This is because antitrust laws enacted decades ago and enforced effectively have prevented monopolies to form in the first place. Microsoft was sued by the U.S. Department of Justice (DOJ) in the late 1990s for alleged monopolistic practices. The case ended in a settlement, not a split-up. However, there is a space to watch today: Facebook and Google. Are they monopolies that need to be split-up to protect consumers? Perhaps, say some proponents.

Case Study

In October 2015 The Hewlett-Packard Company completed a split-up that resulted in the official formation of two new entities, HP Inc. and Hewlett-Packard Enterprises. The rationale behind the split-up was to free the faster growing Hewlett-Packard Enterprises, which markets hardware and software services to large businesses that want to stay on the forefront of "big data" storage and cloud computing, from HP Inc., the purveyor of personal computer, printers and other devices to small and medium-sized businesses. Since these are two very distinct markets, it made sense to allow them to operate separately. Each called for its own organizational structure, management team, salesforce, capital allocation strategy, and research and development initiatives.

With the split-up, shareholders of the original company were able to choose which entity they wished to remain invested in. Those who had no ownership of shares in The Hewlett-Packard Company at the time of the split-up also were presented with two options — one for a slower growing, but perhaps perceptively more stable company, and the other for a faster-growing entity that could better compete head-on in the crowded IT market.