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What is the equity carve outs in divestitures?
Equity carve out is a process, where a subsidiary company is separated from the parent company. Subsidiary company has a new board of directors and financial statements. Parent company offers strategic support and resources.
The parent company also retains controlling the interest in the new entity. Equity carve out allows strategically diversification (other than its core operation).
Understanding carve outs
Parent company sells some of the shares of its subsidiary or child company through Initial public offering (IPO). The subsidiary or child companies have new shareholders after the event. Usually, carve out is followed by full spin off of subsidiaries to shareholders of the parent company.
Carve out is nothing but separating a subsidiary or child company from its parent company and making the subsidiary or child company as a standalone company. Now this newly formed company has a new board of directors and independent financial statements. But the parent company still holds the control and provides necessary support to the newly formed company.
Why equity carve outs are preferred
Business units are deeply integrated and are hard to sell totally (keeping insolvent). By equity carve out; the parent company cuts its ties with its subsidiary. Equity carve out allows companies to cash for its shares.
If the company is accepting more buyers for their business or company wants to control over new business units, they will opt for equity carve out.
Working of carve out
Carve out can work under following −
Seller needs to understand the motivation of the buyer.
Sellers have to prepare financial statements pro-forma of carve out units for valuation, compliance and valuation.
Sellers should maintain transparency about cost of purchase.
Sellers need to assess the impact of carving out.
Benefits of equity carve out
The benefits of equity carve out are as follows −
Both parent and subsidiary are benefited with this process.
Focuses on core operations by streamlines.
Can go for a longer period of time.
In 1994 American Express announced the spinoff of one of its units (investment banking unit) and formed a new entity called Lehman Brothers. The newly formed entity (Lehman Brothers) jointly owned by American express shareholders and Lehman brothers employees.
Lehman Brothers includes corporate services, financial planning, signature charge card and travel planning. These services are marketed under the brand name of American express. To support financially American express infuses more than $1 billion in Lehman Brothers in the form of capital. Though Lehman brothers have independent directors it gets its share.
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