Equity Carveout Case Study

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In an equity carveout, some or all of the shares of a subsidiary company are sold to the public in a registered public offering. An equity carveout can be structured as a primary offering in which the subsidiary sells newly issued shares to the public, as a secondary offering in which the parent company sells shares it already owns to the public, or, rarely, as a combined primary and secondary offering. Equity carveouts are sometimes also called subsidiary IPOs or carveouts. An important distinction of an equity carveout from a spin-off is that the shareholders investing in the subsidiary through an equity carveout are different from the parent’s shareholders, whereas in a spin-off, the parent’s shareholders become the shareholders of the …show more content…

Moreover, equity carveouts often involve the sale of shares representing less than 20% of the subsidiary’s voting power, the threshold under which the parent can continue to consolidate the subsidiary for U.S. federal income tax purposes. The parent can continue to consolidate the subsidiary for accounting purposes if shares representing less than 50% of the subsidiary’s voting power are sold in the offering. For more information regarding tax issues involved in an equity carveout, see Other Regulatory Requirements for an Equity Carveout—Tax Issues [ADD LINK]. In addition to tax and accounting considerations, when determining the size of the offering, the parent must consider its own capital needs and the capital needs of its subsidiary, market conditions, and its motivations to divest from the subsidiary (i.e., does the parent company want to reduce its interest in the subsidiary to a minority …show more content…

As with a spin-off, this separation can help to create value for a company that may have been otherwise unrealized as a larger company by: (i) enhancing business focus by enabling each company to develop its own strategic and operational plans; (ii) creating independent capital structures for each company that can be tailored to each company’s specific business needs; (iii) allowing distinct and targeted investment opportunities for each company; (iv) facilitating M&A transactions by providing equity for use as an acquisition currency; and (v) enabling the creation of compensation packages for management of each company that are better aligned to the success of each company’s business since there will be publicly traded equity for each company and compensation can be based on stock performance. In addition to the general reasons for divesting a business discussed in Overview—Why do Companies Divest [ADD LINK], a principal reason a company may choose an equity carveout over a different divestiture method (such as a sale or spin-off) is that an equity carveout raises capital at a fair price for the subsidiary and/or the parent since shares are sold to the public. Moreover, because a carved-out business can gain direct access to capital markets to help fund projects, division managers can exercise

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