Carve-Out

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A carve-out is the separation of a business unit from its parent company, either by selling it or by listing part of it on a stock market, while the parent often keeps a stake.

The term is used in two related ways. In an equity carve-out, the parent sells a minority stake in a subsidiary to the public through an initial public offering, while keeping control. In a broader sense, carve-out refers to any sale or separation of a division from a larger company.

For example, a conglomerate might sell 20% of its medical devices division through a stock market listing, raising cash and establishing a market value for the business, while keeping 80% ownership.

Companies pursue carve-outs to raise money, highlight the value of a business that investors may overlook, give a division more independence or prepare for a full separation later.

Carve-outs can be complex. The separated business may share systems, staff, facilities and contracts with the parent, requiring transition services agreements. Preparing separate financial statements, called carve-out financials, can be challenging. Buyers of carved-out businesses must assess the costs of making them fully standalone.

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