What Is a Carve-Out?
A carve-out is the partial divestiture of a business unit in which a parent company sells minority interest of a child company to outside investors.
A company undertaking a carve-out is not selling a business unit outright but, instead, is selling an equity stake in that business or spinning the business off on its own while retaining an equity stake. A carve-out allows a company to capitalize on a business segment that may not be part of its core operations.
Unlike a spin-off, the parent company generally receives a cash inflow through a carve-out.
How a Carve-Out Works
In a carve-out, the parent company sells some or all of the shares in its subsidiary to the public through an initial public offering (IPO). Since shares are sold to the public, a carve-out also establishes a new set of shareholders in the subsidiary. A carve-out often precedes the full spin-off of the subsidiary to the parent company's shareholders. In order for such a future spin-off to be tax-free, it has to satisfy the 80 percent control requirement, which means that not more than 20 percent of the subsidiary's stock can be offered in an IPO.
A carve-out effectively separates a subsidiary or business unit from its parent as a standalone company. The new organization has its own board of directors and financial statements. However, the parent company usually retains a controlling interest in the new company and offers strategic support and resources to help the business succeed.
A corporation may resort to 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 considering an investment in the carve-out must consider what might happen if the original company completely cuts its ties with the carve-out and what prompted the carve-out in the first place.
- In a carve-out, the parent company sells some or all of the shares in its subsidiary to the public through an initial public offering (IPO), effectively separates a subsidiary or business unit from its parent as a standalone company.
- Since shares are sold to the public, a carve-out also establishes a new set of shareholders in the subsidiary.
- A carve-out allows a company to capitalize on a business segment that may not be part of its core operations.
Carve-Outs vs. Spin-Offs
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 divestment option is the spin-off. In this strategy, the company divests a business unit by making that unit its own standalone company. Rather than selling 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. For example, in 2015, GE completed a two-year process of separating Synchrony Financial (NYSE: SYF), the largest U.S. provider of private label credit cards, in a $20.4 billion spin-off.