Carve-Out

Carve-out describes a partial divestiture of an asset, mainly when a small part is sold by the parent company of their child’s organization to an outside investor. To divest an asset, a company is typically not selling off the entire business unit but rather selling off a stake in the business.

The company may retain an equity stake while selling off another percentage or piece of that business unit. This is considered an offshoot of a company that is run and operated separately from its parent company to keep the core operations (the parent company’s forte) intact. In this process, a parent company known as the sponsor establishes new investors and sets up new shareholders in the subsidiary.

When it is conducted at or before the time of a complete spin-off to the parent company’s shareholders, it is called a pre-spin carve-out. To be tax-free, such a future spin-off must meet the 80 percent control requirement, meaning that it can offer no more than 20 percent of the subsidiary’s stock in an IPO.