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costbasis.com

Splits-Offs of Stock
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 proportionate 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.   The final exchange ratio will be determined on December 11, 2009.
 
 
          Click on the image below
  to access our free
 Split-Off Calculator

Split-Off Calculator
Split-Off Calculator
Some other recent split-off transactions include:
Chipotle from McDonald's
Folgers from Procter & Gamble
Post Cereals 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. 



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