Carve-Out

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What is 'Carve-Out'

Carve-out is the partial divestiture of a business unit. A company undertaking a carve-out is not selling a business unit outright, and may instead sell an equity stake in that business or spin the business off on its own while retaining an equity stake itself. A carve-out allows a company to capitalize on a business unit that may not be part of its core operations.

BREAKING DOWN 'Carve-Out'

A company may use a carve-out strategy rather than a total divestiture for several reasons, and regulators take this into account when approving or disapproving such restructuring. Sometimes a business unit is deeply integrated, making it hard for the company to sell the unit off completely while keeping it solvent. Those looking at investing in the carve-out must consider what would happen if the original company completely cut ties, and what prompted the carve-out in the first place.

In an equity carve-out, a business sells shares in a business unit. The ultimate goal of the company may be to fully divest its interests, but this may not be for several years. The equity carve-out allows the company to receive cash for the shares it sells now. This type of carve-out may be used if the company does not believe that a single buyer for the entire business is available, or if the company wants to maintain some control over the business unit.

Another carve-out option is the spinoff. In this strategy, the company divests a business unit by making that unit its own stand-alone company. Rather than sell shares in the business unit publicly, current investors are given shares in the new company. The business unit spun off is now an independent company with its own shareholders, though the original parent company may still own an equity stake.

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