Cleavage

A split is the division of a company into two or more companies, whether new or pre-existing.

A split is an operation contrary to a merger . In it, a company separates or divides its assets, liabilities and share capital to form a set of two or more companies. The original company is called a spin-off and the companies after the operation are called split.

Characteristics of a split

Excision has the following basic characteristics:

  • It occurs when a company divides its assetsliabilities and share capital into two or more parts that are contributed to other (split-off) companies.
  • The partners of the original company are also of the companies after the operation. In the operation they are given shares of the beneficiary companies in exchange for the sharesof the spinning company.
  • The original society may or may not disappear.
  • The original company generally changes its name or denomination.
  • The spin-off societies may be new or already existed.

Forms of excision

There are three forms of excision:

  • Total or pure: a company divides its social assets into two or more parts and transfers them to other companies, whether new or pre-existing. The original society disappears.
  • Partial: when a company delivers part of its social assets to one or more companies (new or existing). The original society does not disappear.
  • Majority interests: occurs when a company that has a majority interest in the capital stock of another company, transmits these values ​​or rights to another company.

In all these cases, the transfer of equity or rights will imply that the original partners are compensated with the delivery of rights over the beneficiary companies.

Reasons that explain a split

There are several reasons that can explain the decision of a society to undergo a split, among them we find:

  • Disagreements or serious disagreements between the partners. Heirs or founders who fail to agree on the management of the company.
  • Strategic decisions that include: risk diversification, focus on an area or activity, overcome barriers to entry, image before society, etc.
  • Search for greater capital leverage. The new minority shareholders of the spin-off companies contribute resources but are not entitled to the original company.
  • Requirement of the competition authority or agency. When it is estimated that there is a significant risk to free competition .

Excision Example

In 1984, the American telephone company AT&T (American Telephone & Telegraph) was forced into a split to form 7 local telephone companies (nicknamed Baby Bells). The splitting company (nicknamed Mama Bell) was in charge of long distance telephony and Bell laboratories.

The objective of the split in this case was to break the monopoly of AT&T and foster competition.

 

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