The Disadvantages of a Split-Up in Corporate Divestiture

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When a company decides to divest itself of a division, it can either do a spin-off or a split-off. Each choice has its disadvantages. Where a spin-off involves giving shareholders shares in the new company, a split-off offers shareholders the opportunity to exchange their shares in the parent company for shares in the new company. This can present problems.

Lawsuits

Shareholders may sue the parent company if they feel the ratio of new shares to old shares is unfair. This kind of lawsuit can be both costly and time-consuming, eating into the parent company's profits from the split-off.

Takeover Threat

Both parent companies and their spin-offs and split-offs are more likely to be the target of takeovers. When a company starts divesting itself of assets, it becomes cheaper to buy or take over. Shareholders may not like the company that takes over, and shareholder relations can suffer.

Underperformance

According to Prentice Hall, 60 percent of companies that split up have stock that underperforms the S&P 500. In short, investors do not respond favorably to corporate split-ups, viewing the remaining smaller companies as less valuable than they were when they were part of a larger company.

Loss of Control

When a parent company spins off a subsidiary as a completely new company, the parent loses control of the assets in the new company. Since assets produce income, the company loses the means to make money, as well as the tax write-offs on the assets that were spun off.

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