Carve-Out

What is Carve-Out?

A carve-out is when a company separates a subsidiary from itself to make it a standalone company. The Parent Company will still have a controlling interest in the new company, but the company will have its board of directors and financial statements. The parent company will also have extended support with regards to resources and the success of the new company.

Please note that carve-out does not mean that the company is selling its business unit outright, but selling a portion of the equity stake of the business. The parent company will have the majority of the equity for itself. This move helps the company to diversify into other businesses which may be different from its core operation.

Benefits of Carve-Out

A carve-out benefit the parent company as well as the newly established company. It is a win-win situation for both. Both the companies can help each other grow thereby increasing profitability.

For example, one company can focus on Manufacturing and the subsidiary can focus on marketing. Both should be able to experience independence with regards to their operations.

Drawbacks

Sometimes this kind of situation can also be a Call for conflicts. A very few succeed in keeping a strong relationship for a long time.

The parent company does reserve their rights as long as possible by retaining over 50% equity or increased shareholding by rivals or competitors. This may directly affect the benefit the carve-out was intended for.