WHAT IS Minority IPO

A minority IPO is an initial public offering in which a parent company spins off one of its subsidiaries or divisions, but retains a majority stake in the company after issuance. This means that after the public offering, the parent company will still have a controlling stake of the new public company. Shareholders who purchase shares during the IPO will only be minority owners of the company, hence the name minority IPO. A minority IPO is also called a partial IPO.

BREAKING DOWN Minority IPO

A minority IPO allows a parent company to guide a subsidiary through the initial public offering process while regaining enough to control to protect a vulnerable company from takeover or bad management decisions by retaining majority control of the subsidiary. The parent company may retain this majority stake forever or may slowly dissolve its ownership over time, depending on the parent company’s goals for the subsidiary.

Creating this type of IPO allows the parent company to raise funds, accessing the value of the subsidiary, to fund its own operation or return value to shareholders. It is also a way for the parent company to grow a valuable business line or maximize brand equity while preventing the parent company from becoming a conglomerate and losing efficiencies.

Benefits of a Minority IPO

A minority, or partial, IPO is a way for a company to raise significant amounts of capital on a brand or company it owns without giving up ownership or control of that company. In a regular IPO, enough shares are offered up for sale to the public that any one entity gaining control of those shares would have decision-making rights over the company by being the majority owner. Since the parent company retains majority rights in a minority IPO issue, even if another entity gained control over all the shares issued publicly during the IPO, it would never have majority control and could not make decisions for the company.

This structure benefits both the parent company, which is still connected to the subsidiary company and has born significant risk to scaffold the subsidiary through the IPO process, and the minority IPO company, which needs time to develop and mature as a publicly held company.

Depending on how the parent company acquired the subsidiary, the minority IPO may also be a way to prevent previous ownership from regaining control of the subsidiary. If the parent company acquired the subsidiary by buying it or merging with it, the previous owner may have a vested interest in regaining control, and a minority IPO structure will prevent that from happening.