Understanding Stock Splits During Company Breakups
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The Basics of Stock Divestment
When a company breaks apart, there are several ways in which stock splits can occur. It's important to understand the different methods involved. A carve-out happens when a company sells shares of the separated unit through an initial public offering (IPO). A spin-off occurs when the management distributes shares of the new company to existing shareholders as a special dividend. A split-off allows current shareholders to exchange their shares in the parent company for shares in the new entity. The tax implications for shareholders vary and depend on the extent of the subsidiary divestment by the parent company.
Bausch Health (BHC) and Johnson & Johnson (JNJ) Examples
Let's take a look at two recent examples to illustrate these concepts. In the case of Bausch Health (BHC), the management chose to carve out Bausch + Lomb (BLCO) by selling approximately 12% of the company through an IPO. The company is currently working on plans to divest the remaining stake in BLCO through a spin-off of at least 80% of the company. Once this spin-off occurs, you should receive your shares in BLCO. It may be taking longer than expected, but rest assured that you will eventually receive your shares.
On the other hand, Johnson & Johnson (JNJ) opted for a split-off when they carved out 10% of Kenvue (KVUE) and sold it via an IPO. However, unlike BHC, JNJ made a tender offer to existing shareholders for at least 80.1% of Kenvue shares to avoid taxes. To participate in this exchange offer, you would have needed to opt in and exchange your JNJ shares for KVUE shares through your brokerage before the expiration of the offer.
General Electric (GE) and Pure Spin-Off
In the case of General Electric (GE), the management chose a pure spin-off strategy for both the health-care division, GE HealthCare (GEHC), and GE Verona. This spin-off is expected to finalize in early 2024. For GEHC, the management spun off 80.1% of the company to existing shareholders, distributing one share of GEHC for every three shares of GE common stock held at the time.
In conclusion, understanding the various ways in which stock splits occur during company breakups is crucial for investors. Each method has its own implications and tax considerations. It's important to stay informed about the specific actions taken by the company in which you hold shares. If you have any further questions, feel free to reach out to us at investingclubmailbag@cnbc.com.
Conclusion: Implications for New Businesses
The concept of stock splits during company breakups can have profound implications for new businesses, particularly those considering public offerings or corporate restructuring. Understanding the various methods of stock divestment, from carve-outs to spin-offs and split-offs, is crucial for strategic planning and decision-making.
Strategic Considerations
For new businesses, these strategies offer different avenues for raising capital, managing assets, and restructuring the company. For instance, a carve-out through an IPO can generate funds for growth, while a spin-off can help streamline operations and focus on core competencies.
Investor Relations and Tax Implications
Moreover, these strategies have different impacts on shareholders and tax implications, which can influence investor relations and corporate reputation. Therefore, businesses must carefully consider these factors when planning stock splits during company breakups.
In conclusion, while stock splits during company breakups are complex processes, they offer strategic opportunities for new businesses. By understanding these methods and their implications, businesses can make informed decisions that align with their goals and maximize shareholder value.
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