Carve Out

What is a Carve-Out?

A carve-out is a corporate strategy in which a company separates a portion of its business, such as a division, unit, or subsidiary, and sells it off or spins it out into a new, independent company.

The original (parent) company may:

• Sell a stake in the unit to outside investors (partial carve-out), or

• Fully separate it through a new public listing or sale (full carve-out).

Why Companies Do Carve-Outs?

Companies pursue carve-outs for several strategic or financial reasons:

• Unlock Hidden Value: The carved-out business might perform better as an independent entity.

• Focus on Core Operations: Allows the parent company to focus on its main business.

• Raise Capital: Selling part of the business can raise funds without taking on debt.

• Regulatory Pressure: Carve-outs can help comply with antitrust or government rules.

• Prepare for Full Spin-Off: Sometimes it’s the first step before a complete separation.

Types of Carve-Outs

1. Equity Carve-Out (ECO)

• The parent company sells a minority stake (often <20%) in a subsidiary via an IPO.

• The carved-out business becomes a publicly traded company.

• Example: Siemens carved out its healthcare unit, Siemens Healthineers, through an IPO.

2. Asset Carve-Out

• Specific assets or business lines are sold directly to another firm.

• No new company is formed.

• Example: A telecom company selling off its tower infrastructure.

3. Spin-Off vs. Carve-Out

• A spin-off distributes shares of the new company to existing shareholders with no capital raised.

• A carve-out typically involves raising money by selling shares to new investors.

Real-World Examples

• HPE & HPI: Hewlett-Packard carved out its enterprise business (HPE) and PC/printer business (HPI) into two separate public companies.

• PayPal from eBay: Initially carved out and eventually became a fully independent company due to investor pressure.

• Vedanta: Vedanta Ltd. has considered carving out its businesses like aluminium and oil & gas into separate entities.

Benefits of a Carve-Out

1. Market Clarity: Each entity can be better understood and valued by investors.

2. Operational Focus: Both parent and carve-out entity can work on their strengths.

3. Improved Management: Separate leadership teams with specialized skills.

4. Liquidity: Raises capital without giving up control of the parent company.

Challenges and Risks

1. Complex Execution: Legal, financial, and operational complexities involved.

2. Brand Dilution: The new entity might lose benefits of the parent’s brand.

3. Cultural Shift: Employees may face disruption or uncertainty.

4. Market Reaction: If not well-received, stock prices of the parent or new company may drop.