It is an undeniable fact that companies may face some challenges in their business. The challenges could be related to cash, debts or about making less profit. For this, they may need to sell their assets to improve their financial conditions.
Two such procedures are spin off and divestiture. These terms soften confuse people due to their relevancy in distributing or selling assets. But they are different in their objectives and principles.
Spin-Off vs Divestiture
The main difference between spin off and divestiture is that spin off is defined to be the process of reducing shares of a company to create an independent company.
Divestiture means getting rid of shares for various reasons. It may be to pay back debt, solve a money problem or create additional profit. The other features that differentiate between spin off and divestiture are shown in the comparison table below.
Comparison Table Between Spin-Off and Divestiture (in Tabular Form)
| Parameter of Comparison | Spin off | Divestiture |
|---|---|---|
| Definition | Getting rid of shares of an existing company to make a new company. | Getting rid of business assets for multiple reasons. |
| Objective | To focus on a particular sector of the parent company for more profit. | Pay debts, get cash, focus on a few important product lines. |
| Inheritance | Inherits the management structure and other assets of the parent company. | Once the assets are sold, the company has no say in how they are further used. |
| Drawbacks | The costs may increase because the parent company needs to with the spin off too | The decision may be taken without expert advice and the product may no longer exist for re-selling. |
| Example | eBay establishing a spin off PayPal. | Thomson Reuters distributing its property to minimize costs. |
What is Spin-Off?
Spin off is the process of creating a new company through distributing and selling some of its shares. This new independent unit will have its own rules and management. The parent company can always provide help and technical support if required.
There could be various reasons for spin off. The company may want to work on the most profitable unit of their company and make it a separate division. It may also spin off units with little growth so it can focus on higher growth units. Sometimes, the company may come up with an innovative concept and want to leverage this opportunity in the best way.
So the company may do so by a spin off. Certain drawbacks accompany the spin off procedure. Since the spin off will also generate costs like that of rent, tax, maintenance so the parent corporation needs to handle that too. The leadership is also sometimes divided among the two companies.
When the spinoff is finally able to stand on its feet, it may need a proper operational unit, marketing unit and management. So it needs long term support from the parent company. When the employees are moved to the new company, they may feel some sort of resentment because the spin company might not be as successful as the parent company in the start. So, they may suffer from an identity crisis.
The most popular example of spin off is in the e-commerce sector. eBay created a spin company PayPal which is a money transferring unit. The reason was that it had higher growth potential and was very accepting in the market.
What is Divestiture?
Divestiture is a process that businesses use to dispose some of their assets. There are various reasons for that. This usually happens when the companies are focusing on many different product lines and it is getting harder for them to manage.
Some product lines are just not making enough money and their product lines are under-performing. Sometimes, the businesses are in debt and need to overcome the problem of cash flow. Also, the business may get bankrupt and they may need to liquidate their assets.
Sometimes, the same business opens its branches in several locations and not every branch may be making a profit for you. All these situations require you to divest your assets. But there are certain things you can consider before starting the process.
You can have a look at your assets and try to divest those which would be able to make more cash for you. You can analyze your product lifecycle. The best time to end your product line would be when it has reached its decline stage.
So, using business divestiture may be a good strategy but this decision is not to be made in a rush. You may want to sit and think before getting rid of your product. Your product success may be depending on spending more money into its marketing.
An example of divestiture is that a mass media and information venture, Thomson Reuters had to sell its property in 2016 to reduce the costs of the leverage.
Main Differences Between Spin-Off and Divestiture
Some of the features that differentiate between spin off and divestiture are given below:
- Spin off is the process of disposing some of the shares of an existing company to make a new company while divestiture is the process of disposing some of the business assets for multiple reasons.
- The objective of spin off is to focus on one strong division for more profit while the objective of divestiture is to pay debts, receive cash and emphasis on some significant product lines.
- Spin off acquires the management structure and other intellectual property of the existing company whereas in divestiture, the company does not interfere in the matters regarding how the assets will be used after they are sold.
- The drawback of spin off is that the company costs may rise because the parent company needs to take care of the spin off too initially whereas the drawback of divestiture is that the agreement may be made in a hurry and the product may be permanently gone.
- Example of spin off includes eBay creating a spin off PayPal. Example of divestiture includes Thomson Reuters selling its property to reduce costs.
Conclusion
It is important to sit down with your financial professional once in a while to discuss the current situation of your business and whether to go for spin off or divestiture.
But it is advised that no decision should be taken in desperation as it can cause some other unseen losses.
References
- https://www.sciencedirect.com/science/article/pii/0304405X83900429
- https://academic.oup.com/rfs/article-abstract/20/3/557/1563919