View source for Finance:Equity carve-out

{{short description|Type of corporate reorganization}}
'''Equity carve-out''' ('''ECO'''), also known as a ''split-off [[Finance:Initial public offering|IPO]]'' or a ''partial [[Finance:Corporate spin-off|spin-off]]'', is a type of corporate reorganization, in which a company creates a new [[Social:Subsidiary|subsidiary]] and subsequently IPOs it, while retaining [[Control (management)|management control]].<ref>{{cite web |url=http://www.yourdictionary.com/equity-carve-out#business |title=equity carve-out - Business Definition |publisher=Your Dictionary |access-date=September 1, 2013 |url-status=dead |archive-url=https://web.archive.org/web/20130917135726/http://www.yourdictionary.com/equity-carve-out#business |archive-date=September 17, 2013 }}</ref><ref>[http://www.answers.com/topic/equity-carve-out Investment Dictionary: Carve-out]</ref> 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==
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 [[Finance:Seasoned equity offering|seasoned offering]] (SEO) of the parent equity.

==Advantages==
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.<ref>{{Cite journal|last1=Pham|first1=Dung (June)|last2=Nguyen|first2=Thanh|last3=Pham|first3=Trang Minh|last4=Adhikari|first4=Hari|date=2020-03-14|title=Corporate Divestiture Decisions and Long-Run Performance|url=https://www.tandfonline.com/doi/full/10.1080/15427560.2020.1735389|journal=Journal of Behavioral Finance|volume=22|issue=2|language=en|pages=126–140|doi=10.1080/15427560.2020.1735389|s2cid=216462707|issn=1542-7560}}</ref>

==Challenges==
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.<ref>{{cite journal|last1=Bell|first1=Dean|last2=Benard|first2=Tracy|title=An Accounting Focus can Enhance Carve-out Values |journal=Transaction Advisors|issn=2329-9134|url=https://www.transactionadvisors.com/insights/accounting-focus-can-enhance-carve-out-values}}</ref>

==See also==
* [[Finance:Tracking stock|Tracking stock]]

==References==
{{reflist}}

==External links==
*[https://web.archive.org/web/20110719195652/http://www.cpbis.gatech.edu/files/presentations/071022%20Parthasarathy_Equity_TAPPI_Jacksonville.pdf EQUITY CARVE-OUT (ECO)AS A FINANCIAL INSTRUMENT FOR CORPORATE RESTRUCTURING]
*[http://web.ebscohost.com/ehost/detail?vid=1&hid=13&sid=05f02896-0d7f-4144-99cc-c9757a54394f%40sessionmgr13&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d The Pricing of Equity Carve-Outs]{{Dead link|date=August 2019 |bot=InternetArchiveBot |fix-attempted=yes }}
*[https://web.archive.org/web/20110716071057/http://www.sify.com/finance/equity-carve-outs-in-favour-across-power-companies-news-default-jegq09cbceh.html Equity carve-outs in favour across power companies]

{{Corporate finance and investment banking}}

[[Category:Initial public offering]]

{{Sourceattribution|Equity carve-out}}