Carve-Out: Definition, Process, and How It Differs from a Spin-Off

What is a carve-out?

A carve-out occurs when a parent company sells a minority stake in a subsidiary to outside investors—typically via an initial public offering (IPO)—creating a legally separate company with its own shareholders while the parent retains a portion of ownership. Unlike a spin-off, a carve-out usually generates immediate cash for the parent and can serve as an intermediate step toward full separation or continued partial ownership.

How the carve-out process works

• The parent creates a standalone entity by separating a business unit or subsidiary from the parent’s consolidated operations.
• The subsidiary receives its own board of directors, financial statements, and governance structure.
• The parent offers a portion of the subsidiary’s equity to outside investors through an IPO or private placement, creating new public shareholders.
• The parent typically retains a controlling or significant minority stake and may continue to provide strategic, operating, or financial support.

Reasons companies choose carve-outs

• Raise cash while keeping strategic exposure to a business unit.
• Unlock value by allowing the market to price the subsidiary independently.
• Test the subsidiary’s ability to operate as a standalone business.
• Gradually prepare for a full divestiture without an abrupt break.
• Avoid the operational disruption or regulatory hurdles of an outright sale when a unit is highly integrated.

Carve-out vs. spin-off

Carve-out
* Sells a minority interest (often via IPO) to public investors.
* Generates immediate cash for the parent.
* Parent usually retains a continuing equity stake and may maintain control.
* Can be a prelude to a later full separation.

Spin-off
* Distributes shares of the subsidiary to existing shareholders of the parent (no cash inflow to the parent).
* Creates an independent company owned directly by the parent’s shareholders.
* Parent may or may not retain an equity stake, but the typical spin-off results in separate ownership structures.
* To preserve tax-free treatment for a later spin-off, the parent generally must retain at least 80% ownership during intermediate steps—meaning no more than about 20% of the subsidiary is typically sold in an IPO if tax-free status is desired.

Investor and regulatory considerations

• Evaluate strategic reasons behind the carve-out: Is it to raise capital, improve focus, or prepare for full divestiture?
• Assess operational ties to the parent. Highly integrated units may face disruption if ties are severed.
• Consider corporate governance changes, potential conflicts of interest, and how much autonomy the carved-out company will have.
• Anticipate how regulators or tax authorities may view the transaction, particularly where tax-free treatment of subsequent transactions is sought.

Key takeaways

• A carve-out sells a minority stake in a subsidiary to outside investors, creating a separate company while the parent retains ownership.
• It provides immediate cash to the parent and flexibility for future strategic moves.
• Carve-outs differ from spin-offs, which distribute shares to existing shareholders and generally do not provide cash to the parent.
• Tax and control rules often shape how much equity can be sold in an IPO if a later tax-free spin-off is planned.

Bottom line

Carve-outs are strategic tools for unlocking value, raising capital, and gradually separating business units without a full immediate divestiture. They offer flexibility but require careful planning around governance, integration risks, and tax implications to achieve the intended corporate and shareholder outcomes.