What Is a Minority IPO?
- A minority IPO is a type of spinoff transaction in which a parent company sells a non-controlling share of one or more of its subsidiaries.
- It is often used by conglomerates who feel that they are being undervalued by investors.
- Minority IPOs can provide more granular financial reporting and improved liquidity for investors.
How Minority IPOs Work
Minority IPO transactions can be an effective way for parent companies to obtain more favorable valuations when they feel that some of their subsidiary businesses are being chronically undervalued by the investment community. This situation is known to arise with regard to large conglomerates such as General Electric (GE) or Berkshire Hathaway (BRK.B), which are home to several distinct and complex business operations. In such cases, investors and analysts might struggle to understand the intricacies of the various businesses in the parent company’s portfolio, leading some subsidiaries to be misunderstood or overlooked.
Listing these subsidiaries as separate publicly traded companies often results in the spun-off business being valued more richly than was the case prior to its separation from the parent company. One possible explanation for this phenomenon is that the financial statements of the newly separated company offer greater clarity for investment analysts as compared to the consolidated financial statements produced by the parent company. Similarly, investors may be attracted to the specific business model of the new company without necessarily being interested in the many other businesses in the holding company’s portfolio.
Depending on how the parent company first acquired the subsidiary, the minority IPO may also be used as a means of preventing the previous ownership from regaining control of the subsidiary. For example, if the parent company acquired the subsidiary through a merger or acquisition, the previous owner may have a vested interest in regaining control. Under these circumstances, a minority IPO structure could be used as part of a strategy to prevent this takeover from occurring.
Example of a Minority IPO
XYZ Corporation is a prominent holding company that owns a diversified portfolio of businesses. One of its subsidiaries, ABC Technologies, has recently attracted substantial media attention due to a major product innovation.
At its most recent annual meeting, several of XYZ’s shareholders expressed concern that XYZ’s market capitalization failed to reflect the true value of this promising subsidiary. They argued that this was likely due to XYZ’s complex consolidated financial statements, which fail to give investors and analysts a clear view of the rapid business improvements occurring within ABC.
By separating ABC through a minority IPO transaction, these shareholders argued that the sum of the two companies’ market valuations would most likely be greater than the current market valuation of XYZ. Moreover, the minority IPO transaction would not require XYZ’s management to forfeit control over ABC, as the transaction would only involve the sale of a minority—or “non-controlling”—percentage of the company’s shares.