Roadmap For Successful Carve-Out Projects
Mergers and acquisitions (M&A) are seen as a key factor to growth in business. It seeks to acquire companies that offer the same products, goods, or services. One more process is used. The M&A is done by purchasing a divestiture of a unit or division from the selling company is acquired.
This process is called carve out. It is a partial divestiture of a business unit, subsidiary, or division. It is a complex strategy where the parent company retains equity and shares in the profits of the divested unit.
Reasons for a carve out
There are several reasons why a carve out process looks beneficial. Some key reasons are:
- It allows capitalizing from divestment. The division or unit being divested is not part of its core business and not making as much money as projected. Carve out gives an option to retain equity and continue to earn profits.
- It allows for the new company to gain stability before being fully exposed to aggressive business environments.
- It allows for the creation of a new set of shareholders in the subsidiary as shares may be sold to the public.
- It allows savings in payment of capital gains when compared to a sale or an IPO (initial public offering)
Types of carve out
While considering a carve out strategy, there are two types.
1. Equity Carve Out
In an Equity Carve Out, there is a sale of equity. Ownership shares in the subsidiary or division being divested are sold. This allows the business to have cash flow right at the beginning. This type of carve out is used by:
- Companies that are planning for complete divestiture in the future but still need cash now for sustaining their operations.
- Companies that cannot find one buyer that can afford the acquisition cost.
- Companies that do not wish to give up control over their subsidiary.
