Split-Up: Definition and Purposes in Business, Example

What Is a Split-Up?

A split-up is a financial term describing a corporate action in which a single company splits into two or more independent, separately-run companies. Upon the completion of such events, shares of the original company may be exchanged for shares in one of the new entities at the discretion of shareholders.

Understanding Split-Ups

Companies most often undergo split-ups for for two chief reasons:

Strategic Advantage

Some companies undergo split-ups because they are attempting to strategically revamp their operations. Such companies may have a broad range of discrete business lines--each requiring its own resources, capital financing, and management personnel. For such companies, split-ups may greatly benefit shareholders, because separately managing each segment often maximizes the profits of each entity. Ideally, the combined profits of the separated entities exceed those of the single entity from which they sprang from.

Governmental Mandate

Companies often split-up due to the intervention of the government, which forces such action in an attempt to minimize monopolistic practices. But it has been a long time since the market has seen a pure monopoly break-up, mainly because antitrust laws enacted decades ago have largely squashed monopolies from forming in the first place. Case in point: in the late 1990s, the U.S. Department of Justice (DOJ) sued Microsoft for alleged monopolistic practices. Interestingly, the case ended in a settlement, not a split-up. Some speculators believe that Meta (formerly Facebook), and Google are essentially monopolies that the government must split-up to protect consumers.

Hewlett-Packard: a 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 split-up was executed to strategically silo these two groups, because each one focused on different business models. Pointedly: Hewlett-Packard Enterprises markets hardware and software services to large businesses seeking big data storage and cloud computing technology. On the other hand, HP Inc. focusses on manufacturing personal computers, printers, and other devices geared toward small and medium-sized business owners. This split-up ultimately allowed each business entity to more efficiently run its own organizational structure, management team, salesforce, capital allocation strategy, and research and development initiatives.

After the split-up, existing shareholders of the original company and new investors alike were given the opportunity to choose which of the two new entities they wished to obtain shares in. Investors who favored exposure to a perceptively more stable, slower-growing company likely opted for shares in HP Inc., while those who preferred a faster-growing entity that could better compete in the crowded IT space likely leaned toward shares in Hewlett-Packard Enterprises.