Roadmap For Successful Carve-Out Projects
Reasons for a carve out
- 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
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.
A Spin-off is when the divested unit or division becomes an independent business unit. Shares in the unit are not sold to the buyer. The new unit will have its shareholders and management. However, the parent company may still retain some shares in the divested company.
How does carve out work?
Why to consider carve out in M&A?
While deciding on an M&A, it is essential to consider a carve out.
- It gives considerable operational advantages to the acquiring company.
- It also contributes to savings as existing infrastructure and workforce are brought over to the acquirer.
- It also contributes to the capacity and capability of the acquirer as a functioning unit is purchased.
- The parent company continues to support operations during the transition.
Advantages of Carve out
It acts as a roadmap to the success of the M&A.
Mergers and Acquisitions (M&A) refers to the consolidation of companies through various transactions such as mergers, acquisitions, or divestitures. It involves combining two or more companies to form a new entity or integrating one company into another. M&A activities are undertaken to achieve strategic objectives such as expanding market presence, diversifying product offerings, gaining competitive advantages, or achieving cost synergies.
In M&A, a carve out refers to the process of divesting a business unit or division from a company while retaining equity and profit-sharing in the divested unit. It allows the parent company to focus on its core business and capitalize on the divestment.
Some key reasons for considering a carve out include capitalizing on divestment, allowing the new entity to gain stability before exposure to aggressive business environments, creating a new set of shareholders, and saving on capital gains tax payments compared to a sale or IPO.
A carve out involves separating a subsidiary or division from its parent company while retaining control, equity, and profit-sharing. This is achieved by selling some equity in the divested unit. IT carve out, including data migration and software license management, plays a crucial role in the transition.
Carve outs offer several advantages, including capitalizing on non-core divisions while retaining control and profit-sharing, preventing competitors from gaining undue advantage, ensuring stability for the new entity with support from the parent company, and saving on capital gains tax payments.