A split-off of stock occurs when a corporation decides to demerge part of its business to its shareholders. It is different from a spinoff where every shareholder receives a prorata piece of the business. In a split-off, the parent corporation offers to all of its shareholders the opportunity to exchange shares in the parent for shares in the split-off company. This is usually a tax-free exchange. Unlike a spinoff, the shareholder no longer owns the shares in the parent company that they exchanged.
How do you account for a split-off? In the normal tax-free situation, you carry over your basis and holding period from the parent corporation shares you exchanged to the split-off shares you received. You recognize no gain or loss (except for cash received in lieu of fractional shares.)
A recent example of a split-off transaction is the demerger of Mead Johnson Nutrition Co from Bristol-Myers Squibb.
Click on the image below to access our free Split-Off Calculator
Split-Off Calculator
The chart to the right will help you understand the differences between the various corporate reorganization actions.
Type of Corporate Action
Keep Parent Stock?
Parent Stock Still in Existence?
Spinoffs
Yes
Yes
Split-ups
No
No
Split-offs
No
Yes
Other recent split-off transactions include: Chipotle from McDonald's Folgers from Procter & Gamble Post Cereals (Ralcorp) from Kraft Foods Reinsurance Group of America from MetLife
The new cost basis and gain/loss on cash in lieu of fractional shares can be calculated using our split-off calculator by clicking on the image above.
The exchange ratio is determined based on the relative market values of the original stock and the split-off stock immediately preceding the transaction. Corporations often incentivize shareholders to exchange shares for split-off stock by offering a discount (say 10%.) For example. if they exchange $9.00 in market value of the original stock, they will receive $10.00 in market value of the split-off stock.
Shareholders who subscribe to split-off offers often end up exchanging pro-rated shares if the offer is heavily subscribed. When the split-off company is an attractive investment, many more shareholders will agree to exchange than the number of shares available, so the original stock is pro-rated and only a portion is accepted for the exchange offer. Prorations on the order of 7% have been common in the recent past. For example, with the McDonalds split-off of Chipotle, if you submitted 100 shares of your McDonalds, thinking you would get 100 shares of Chipotle, you actually ended up getting only 7 shares. Many investors dislike holding small odd lots in their investment portfolios.
