Company Split-Up (Explained: All You Need To Know)

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What is a Split-Up in business?

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What Is Split-Up In Business

In business, the term split-up refers to a company splitting into two or more independent companies.

In other words, a split-up is a type of corporate action where one company splits into two or more independently operated businesses.

The main reason why a company may decide to split up is to achieve greater operational efficiency or create more value for its shareholders.

It’s also possible that a company is forced to split up as the regulators believe it is exercising too much market power, disrupting the healthy balance in supply and demand.

Generally, when a company splits up, the shareholders of the original company will receive shares in the newly formed entity by way of a share exchange at the shareholder’s discretion.

Keep reading as I will further break down the meaning of a company split-up and tell you how it works.

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Why Is A Company Split-Up Important 

Understanding why companies choose to split up is important.

When companies decide to split up their business voluntarily, they are generally looking to independently develop two or more core business areas, achieve greater operational efficiency, or create additional value for the shareholders.

The idea is that the separate business entities can generate more profits than the business entities combined.

For instance, a company handling several stages in its supply chain may realize that it is too costly for it to handle everything and operationally challenging. 

As a result, it decides to split its business up so that each of the separated entities focuses on one stage of the supply chain.

In this manner, the separate entities can dedicate all their time, attention, and resources to their core competencies.

Aside from strategic considerations, a company may be forced to split up due to a governmental mandate or in the context of a bankruptcy or insolvency proceeding.

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Why Do Companies Split Up 

There can be a variety of reasons why companies decide to split up.

Let’s look at the main reasons for split-ups in business.

Strategic Considerations

The first reason companies or large organizations decide to split up is for strategic considerations.

A conglomerate may choose that it is best to split up its subsidiaries which operate independently from one another and in different industries.

A company having business operations in different stages of its supply chain may find that it is unable to focus and determine that a split up may be the right path forward.

Alternatively, a company may determine that splitting up its business may bring financial, operational, resource, or other advantages.

Legal Requirement

A company may split up not because it believes it’s the best thing to do but because regulators have mandated it as such.

In some cases, regulators may believe that a company exerts too much market control preventing healthy competition from taking place.

As a result, it orders the company to split up to reduce monopolistic practices and restore healthy supply and demand.

There are antitrust laws that grant powers to the government to order the split up of companies when they exert excessive market power.

Insolvency And Bankruptcy

Another potential reason why a company may split up is in the context of insolvency and bankruptcy proceedings.

It’s possible that a company is forced into bankruptcy or becomes insolvent because it lost money in a particular business segment while having other profitable segments.

Company creditors may accept to have the company split up in such a way that they focus on its profitable business segments going forward and liquidate the unprofitable ones.

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How Does A Split Up Work

A split up is a financial term used to refer to a situation when a company splits up into two or more independent businesses.

What characterizes a split up is that the original company that splits up is eventually liquidated and will no longer survive.

The shareholders in the original company are typically given a choice to exchange their shares for the shares of one of the companies resulting from the split up.

For example, the company United Technologies decided to split up into three distinct entities: United Technologies, Otis Elevator Company, and Carrier Global Corporation.

Although one of the resulting companies is still called United Technologies, the company is a brand-new entity that is completely distinct from the original entity.

You’ll know that you are dealing with a “split-up” when a company splits up into different entities and where the original entity is liquidated.

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Company Split-Up Examples

There are many examples of company split-ups that we can provide you to illustrate the concept.

Let’s look at some notable ones in history.

Hewlett-Packard

A notable example of a split up is when the company Hewlett-Packard Company split up into HP Inc. and Hewlett-Package Enterprises.

This was a strategic decision to have the company split up so HP Inc. could focus on computer manufacturing for small and mid-sized companies while Hewlett-Packard Enterprises focus on marketing hardware and software services to large companies and cloud computing.

Tyco International 

Tyco International Plc was a security systems company based in Ireland.

In 2006, the company’s board approved the split up into three distinct companies that they believed could create more value for its shareholders: Covidien Ltd, Tyco Electronics Ltd., and Tyco International Ltd.

United Technologies 

United Technologies is another example of a company splitting up.

In this case, United Technologies decided to split up into three distinct entities: United Technologies, Otis Elevator, and Carrier Global.

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Takeaways 

So there you have it folks!

What does split-up mean in business?

In a nutshell, in business and mergers and acquisitions, split-up refers to a type of corporate action where a single company splits into two or more independent companies. 

This can be done for strategic reasons, due to governmental action, to emerge from a bankruptcy and insolvency proceeding, or other reasons.

Typically, the shares of the original company will be exchanged for one of the companies in the split up based on the shareholder’s discretion as the original company will be liquidated and cease existing.

Now that you know what split-up means in business and how it works, good luck with your research!

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