Equity carve-out (ECO), also known as a ''split-off
IPO'' or a ''partial
spin-off'', is a type of corporate reorganization, in which a company creates a new
subsidiary and subsequently IPOs it, while retaining
management control. 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
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
, giving the carved-out subsidiary strong growth opportunities, while avoiding the negative signaling associated with a
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.
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.
See also
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Tracking stock
Tracking stock, also known as letter stock and targeted stock, is a specialized equity offering issued by a company that is based on the operations of a defined business within the larger organization (such as, for instance, a wholly owned subsi ...
References
External links
EQUITY CARVE-OUT (ECO)AS A FINANCIAL INSTRUMENT FOR CORPORATE RESTRUCTURINGThe Pricing of Equity Carve-Outs
{{Corporate finance and investment banking
Initial public offering
Mergers and acquisitions