Mergers and acquisitions (M&A) are seen as a key factor to growth in business. It seeks to acquire companies that offer the same products, goods, or services. One more process is used. The M&A is done by purchasing a divestiture of a unit or division from the selling company is acquired.

This process is called carve out. It is a partial divestiture of a business unit, subsidiary, or division. It is a complex strategy where the parent company retains equity and shares in the profits of the divested unit.

Reasons for a carve out

There are several reasons why a carve out process looks beneficial. Some key reasons are:

• It allows capitalizing from divestment. The division or unit being divested is not part of its core business and not making as much money as projected. Carve out gives an option to retain equity and continue to earn profits.
• It allows for the new company to gain stability before being fully exposed to aggressive business environments.
• It allows for the creation of a new set of shareholders in the subsidiary as shares may be sold to the public.
• It allows savings in payment of capital gains when compared to a sale or an IPO (initial public offering)

Types of carve out

While considering a carve out strategy, there are two types.

1. Equity Carve Out
In an Equity Carve Out, there is a sale of equity. Ownership shares in the subsidiary or division being divested are sold. This allows the business to have cash flow right at the beginning. This type of carve out is used by:

• Companies that are planning for complete divestiture in the future but still need cash now for sustaining their operations.
• Companies that cannot find one buyer that can afford the acquisition cost.
• Companies that do not wish to give up control over their subsidiary.

2. Spin-off
A Spin-off is when the divested unit or division becomes an independent business unit. Shares in the unit are not sold to the buyer. The new unit will have its shareholders and management. However, the parent company may still retain some shares in the divested company.

How does carve out work?

A carve out process parts a subsidiary or division from its parent company. It, however, ensures that the parent company retains control, equity, and share in the profits. This works by the parent company selling some of the equity in the divested unit.

Why to consider carve out in M&A?

While deciding on an M&A, it is essential to consider a carve out.

• It gives considerable operational advantages to the acquiring company.
• It also contributes to savings as existing infrastructure and workforce are brought over to the acquirer.
• It also contributes to the capacity and capability of the acquirer as a functioning unit is purchased.
• The parent company continues to support operations during the transition.

All that needs to be done is integrate with acquiring companies’ infrastructure. This involves a complex process of data carve out. IT carve out plays a leading role in the entire process. During the transition points like data, software licenses, and SAP carve out are crucial elements of the TSA.

Advantages of Carve out

• Carve out provides an option to capitalize on a division that is not part of the core business. Though there is a sellout, the control, equity, and profit-sharing are still retained.
• By retaining control, the parent company can ensure that a competitor does not get an undue advantage over it.
• It ensures stability for the new entity as there is a transition period. During this period, the parent company provides necessary support to the buyer.
• Savings in capital gains tax payments during carve out.

Conclusion

Carve out gives substantial advantages to the seller such as equity, control, and profit share. It helps the buyer with a working unit with infrastructure and support.

It acts as a roadmap to the success of the M&A.