Equity carve-out
Equity carve-out (ECO), also known as a split-off IPO or a partial spin-off, is a type of corporate reorganization, in which a company creates a new subsidiary and subsequently IPOs it, while retaining management control.[1][2] Only part of the shares are offered to the public, so the parent company retains an equity stake in the subsidiary. Typically, up to 20% of subsidiary shares is offered to the public.
Entities
[edit]The transaction creates two separate legal entities, the parent and the daughter company, each with its own board, management team, CEO, and financials. Equity carve-outs increase the access to capital markets, giving the carved-out subsidiary strong growth opportunities, while avoiding the negative signaling associated with a seasoned offering (SEO) of the parent equity.
Advantages
[edit]If the parent company wants to fully divest the subsidiary, then an equity carve-out allows a prior evaluation of the subsidiary's market value and creates a credible transaction history.
In equity carve-out, the firm sells shares of the divested subsidiary to the public and retains a portion, which is often significant and represents controlling ownership of the subsidiary.[3]
Challenges
[edit]Challenging accounting issues can arise when acquiring carve-outs. Carve-out entities need a clear understanding of what their new stand-alone status means in terms of numerous accounting concepts and they must establish accounting policies in line with their operations.[4]
See also
[edit]References
[edit]- ^ "equity carve-out - Business Definition". Your Dictionary. Archived from the original on September 17, 2013. Retrieved September 1, 2013.
- ^ Investment Dictionary: Carve-out
- ^ Pham, Dung (June); Nguyen, Thanh; Pham, Trang Minh; Adhikari, Hari (2020-03-14). "Corporate Divestiture Decisions and Long-Run Performance". Journal of Behavioral Finance. 22 (2): 126–140. doi:10.1080/15427560.2020.1735389. ISSN 1542-7560. S2CID 216462707.
- ^ Bell, Dean; Benard, Tracy. "An Accounting Focus can Enhance Carve-out Values". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2016-03-04. Retrieved 2015-11-03.
External links
[edit]- EQUITY CARVE-OUT (ECO)AS A FINANCIAL INSTRUMENT FOR CORPORATE RESTRUCTURING
- The Pricing of Equity Carve-Outs[permanent dead link]
- Equity carve-outs in favour across power companies
