Equity Carve-Out: In-Depth Analysis & Applications

An equity carve-out is a corporate strategy where a parent company sells a portion of its ownership in a subsidiary to the public through an initial public offering (IPO). This process allows the parent company to raise capital while still retaining control over the subsidiary. It can be an effective way to unlock value in a subsidiary that may be undervalued when part of a larger corporate structure.

Equity carve-outs are often confused with spin-offs, but they differ significantly. In a spin-off, a subsidiary becomes an independent company, whereas, in a carve-out, the parent retains a significant share of the subsidiary.

When considering an equity carve-out, there are several key components to understand:

• Parent Company: The original company that owns the subsidiary and initiates the carve-out process.

• Subsidiary: The division or entity that is being carved out and offered to the public.

• IPO Process: The mechanism through which shares of the subsidiary are sold to the public, often requiring regulatory approvals and financial disclosures.

• Retained Interest: The percentage of the subsidiary that the parent company continues to own post-IPO, which can influence control and strategic direction.

Equity carve-outs can take various forms, depending on the structure and goals of the parent company:

• Partial Carve-Out: The parent company sells a minority stake in the subsidiary, retaining a majority interest.

• Full Carve-Out: The parent company sells a significant portion but may still retain some ownership for strategic reasons.

• Dual-Class Carve-Out: The parent issues different classes of shares, allowing it to maintain control over the subsidiary while still offering public shares.

The landscape of equity carve-outs is evolving, with several new trends emerging:

• Increased Use of Technology: Companies are leveraging financial technology to streamline the IPO process, making it easier to execute carve-outs.

• Focus on Sustainability: Many companies are carving out subsidiaries that focus on sustainable practices or technologies, aligning with growing investor interest in environmental, social and governance (ESG) criteria.

• Globalization of Markets: As markets become more interconnected, equity carve-outs are increasingly being used by companies in various countries to tap into international capital.

Several high-profile equity carve-outs have illustrated the potential benefits of this strategy:

• eBay and PayPal: eBay carved out PayPal in 2015, allowing it to operate independently. This move significantly increased PayPal’s market value and allowed eBay to refocus on its core e-commerce business.

• Siemens and Siemens Healthineers: Siemens carved out its healthcare division, Siemens Healthineers, enabling the subsidiary to focus on innovation in the healthcare space while providing Siemens with additional capital.

Equity carve-outs can be part of a broader corporate finance strategy. Some related methods include:

• Spin-Offs: Separating a subsidiary into an independent entity.

• Joint Ventures: Collaborating with other companies to share resources and risks.

• Mergers and Acquisitions: Acquiring or merging with other companies to enhance market position.

Equity carve-outs provide a strategic avenue for companies looking to unlock value in their subsidiaries while maintaining a degree of control. By understanding the components, types and emerging trends in equity carve-outs, businesses can make informed decisions that enhance their financial health and market position.

Incorporating equity carve-outs into a corporate finance strategy can lead to improved valuations, increased capital access and a sharper focus on core operations.