Posted in Finance, Accounting and Economics Terms, Total Reads: 604
A strategy adopted by corporates in which a single incorporated organization splits into two or more companies which are then run separately. Stocks of the parent company are exchanged for stocks in the newly formed companies, with the requisite distribution of stocks depending on each specific situation. This in a way very effectively breaks up a company into different companies which are independent. The original company ceases to exist after the split-up.
There can be many reasons for splitting up of a company, but it generally happens for corporate strategic reasons or because the government makes it compulsory. Some companies have a diversified range of business offerings, often highly uncorrelated. This makes it hard for a single management team to enhance the profitability and efficiency of each segment.
It would be much more advantageous to stockholders to split up the company into different independent companies, so that each segment can be managed separately to maximize profitability. The government can also mandate the splitting up of a company, usually due to concerns over practices which may lead to monopoly. In this scenario, it is compulsory that each line of a company that is split up be fully independent from each other, thus ending the monopoly.