Question

Many companies use split-offs as a means to unlock shareholder value. The split-off effectively splits the company into two pieces, each of which can then be valued separately by the stock market. If managers are compensated based on reported profit, how might they strategically structure the split-off? What corporate governance issues does this transaction present?

Answer 1

Split off is a mechanism where an asset is divided into number of units each carrying same value. the Split off methods are very prominently followed for appreciation in the value of Shareholders. the methods enables the shareholders to realize their value as -

A share trading at $100 would attract 1000,000 customers whereas a share trading at $10000 would restrict the number of customers to 10000 only. the fundamental reason behind this is the ability of the customers to buy such high value stocks. when there are higher of customers for a stock, there is liquidity in the market as well as momentum is also good. So, the price moves. But when the number of interested customers decreases, its momentum as well liquidity also goes down.

Hence, to ensure better return for their investment, liquidity and movement, it is a way to deliver to the customers.

If managers are compensated based on reported profit, they can strategically structure the split-off. this is by asking the company for Stocks in return as performance bonus instead of Cash or Cheque returns. With this they can not only secure their Cash salary on periodic basis but also secure appreciation due to Market inflation.