Question

1. Explain the difference between a ‘divestiture’ and a ‘spin-off’.

Answer 1

Spin-off:

In case of a spin off, a business division separates from the parent company and becomes an independent firm. Most of the times, the independent company is created through distribution of new shares of the existing company. Bigger companies go for spin off for better management and to give better focus on the division that is expected to have a good long-term potential and can generate higher revenues in future.
Some big companies also sell their less productive business units and also the subsidiary (that are not related to the core business of the parent company) as spin off. This helps them to streamline their operations.

Example: A company can spin off its mature business that is not showing any growth or experiencing little growth, so that it can focus on the other business divisions with better future growth that can generate higher revenues in future.

Divestiture:

Divestitures refers to sale of an asset or business unit by a big firm. Companies sell the under performing business units and also the units that are not important to the core business of the parent company. Divestitures are also called as divestment.
Some divestitures can also take the form of spin offs, for example separation from the parent company.

Example: Divestitures can also be done due to necessity. A classic example is the division of Bell System in the U.S. in late 90s. This divestiture was ordered by court. Bell system used to control a large portion of the telephone service at that time as determined by the government. Due to this divestiture, many new companies were created. Some of the new companies that were created are AT&T, Baby Bells etc.