Reviewed by Oct 05, 2020| Updated on
Carve-out refers to the partial divestiture of a business unit; particularly, selling off the minority interest of a child company, by a parent company, to investors. It is not selling off a business unit entirely, but it is either selling an equity stake in the business or letting the business function on its own while retaining an equity stake.
The parent company is bound to sell some or all of the shares of its child company to the public through an initial public offering (IPO). After the event, the child company will have a new set of shareholders.
A carve-out is usually followed by the full spin-off of the subsidiary to the parent company's shareholders. The carve-out separates the subsidiary or the business unit from the parent company, making it a standalone company. The company newly formed must have its own board of directors and financial statements.
However, the parent company still maintains a controlling interest in the new company. It may also provide support and resources necessary for the smooth running of the new company.
Usually, corporations choose carve-outs rather than a total divestiture for various reasons. The regulators consider the reason for a carve-out before approving the same.
It may get difficult to sell a deeply-integrated unit off of a business while keeping it solvent. If a company is seeking investments for the carve-out, the company must estimate the consequences of completely cutting off its ties with the carve-out and the initial reason for the carve-out.