Question

When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity, what is this process called?

1) Merger
2) Acquisition
3) Spin-off
4) Divestiture

Answer 1

The process where a company creates a new subsidiary and transfers assets and liabilities to it is called a spin-off, which is distinct from mergers and acquisitions.

Step-by-step explanation:

When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity, this process is called a spin-off. This is different from a merger, which occurs when two formerly separate firms combine into a single firm, or an acquisition, where one company purchases another, which may continue to operate under its former name. A spin-off typically results in the new subsidiary being an independent entity with its own management, although it was created by the parent company. Another scenario that can lead to a rearrangement of properties is divestiture, but this is more about the sale or liquidation of an asset rather than creating a new subsidiary. Spin-offs often happen when a company wants to focus on its core businesses and separate out a division that might perform better as an independent company or is not aligned with the core strategy.