The meaning of carve out in business is the separation of a subsidiary from its parent company, whereby the subsidiary becomes independent while the parent company retains a majority stake in it. Also known as an equity carve out, some shares in the subsidiary are “carved out” and sold via IPO.
Also known as a “split-off IPO” or a “partial spin-off”, it’s easy to see why carve outs and spin offs are sometimes confused.
The main difference between the two is that in an equity carve out, the parent company divests some of its stake in the new subsidiary, which is then sold via IPO. In a spin off however, shares of the new subsidiary are distributed to existing shareholders.
Because it involves the sale of a portion of the subsidiary’s shares via IPO, a carve out is only a partial divestiture. Broadly speaking, we can think of it as a type of company divestiture but not a whole divestiture.
There are plenty of ways they create additional value for the newly independent business.
Independent financing
As a result of its newly created independence, the carved out company may find it easier to source funding. With a debt-free balance sheet and within the context of a more favorable funding environment for smaller businesses, this is not an unusual benefit.
New alliances
Similarly, this new-found independence paves the way for strategic partnerships to be formed that may have previously been out of the question due to the parent company’s ownership.
New customers
Likewise, customers that may previously have boycotted or not had access to the subsidiary due to the parent company, can now deal with the new company directly.
There are also benefits to the parent company.
Retain control while raising funds
One of the main benefits for the parent company is that it can sell some shares, thereby raising funds, while remaining in control and preventing the subsidiary from being purchased by a competitor.
Tax savings
An equity carve out can be a clever way to save on the capital gains taxes on the amount the asset has increased in market value. To take advantage of this benefit, the parent company can only offer up to 20% of its shares in an IPO.
Evaluation of subsidiary’s market value
If underperformance is a factor, the parent company may want to divest the subsidiary fully at some point. If this is the case, an equity carve out allows the parent company to get an evaluation of the subsidiary's market value. It also has the added benefit of creating a credible transaction history.
See also: Benefits of divestiture
In 2018, Deutsche Bank listed its asset management arm, DWS Group, in a long-awaited IPO of approximately USD $1.7 billion.
Baidu went public on the Nasdaq with its video-streaming unit iQIYI in 2018, while retaining a 70% stake in the business.
September 2022 saw Corebridge Financial, a carve-out of AIG's retirement services and life insurance business, go to IPO in a deal also worth $1.7 billion.
Learn more: Examples of Carve Outs
On average, the process takes between 8 and 24 months.
Learn more: Company Carve Out Process
In preparation for a carve out, the organization must go through the due diligence process. This is a thorough examination of the IPO candidate’s financial, tax, legal, commercial, IT, operational, environmental and human resource details.
Learn more: Due Diligence