Separation of Subsidiary Company from the Parent Company could
be only through spin-off, split off, and carve out. In case of split-up or
simply a sale of the subsidiary which we also called as divestiture, the Parent
Company loses control of the current company. This is because in the case of
split-up the Parent Company is liquidated and divided into different companies
leaving the Parent Company dead. And in the case of simply a sale of the
subsidiary or divestiture, the sale of a portion of the firm is done to an
outside party this means that for that portion the Parent Company ceases to
hold the control.
Spin-off
In the case of Spin-off, the company
distributes all the share it owns to its subsidiary and its own shareholders
will get proportional equity ownership of the new company as there shall be
implied creation of two separate public companies.
The stockholder proportion is therefore the
same in the new as well as the Parent Company.
e.g. Air India formed a new separate company
named Air-India Engineering Ltd.
PepsiCo Inc. formed separate companies like
KFC, Pizza Hut and Taco Bell.
Split-off
In the case of Split-off, a new company is
created to take over the operations of an existing unit or division. Of the
Parent Company a portion of the activity showing existing shareholders receive
stock in a subsidiary in exchange for the parent company stock, this,
therefore, does not have any cash flow inflow to the parent company.
e.g. Synchrony Financial from its Parent
Company Generic Electric.
Equity carve out-
In the case of equity carve out the Parent
Company has a holding in the subsidiary as it only sells a certain part to the
public. The Parent Company creates a new corporation and sells shares of the
new corporation through an initial public offering, in this no shares which are
offered shall be exchanged or given to the existing shareholders. The same is
done so that the company can get cash and capital issued.
e.g. Reliance Communications separating its
Towerco- Reliance Telecom Infra. Ltd.
Split-Up-
In the case of split up the entire firm is
broken up in a series of spin-offs. The parent company doesn't survive, only
the new company does the business. New stocks are there for each company and
the Parent Company is fully liquidated.
Therefore, the shareholders of the Parent
Company will become shareholders of new companies that are formed.
e.g. The Birla Group formed several news
companies via split-up.
Simply a sale of subsidy-
In case of divestitures sale of a portion of
the firm is done to an outside party and selling such portions gives money to
the existing company. This money is then invested in the existing operating
parts of the original company, therefore when such a subsidiary is sold to
other parties the Parent Company ceases to hold any control.
e.g. Parle sold its drinks like Thumbs Up,
Limca to Coca Cola for 170 crores.
Lafarge sold its business in cement to Nirma Ltd. in order to get the capital of $1.4 Billion which can be then invested in other businesses owned.
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