Equity carve-out

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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. [1] [2] 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.

A corporate spin-off, also known as a spin-out, or starburst, is a type of corporate action where a company "splits off" a section as a separate business.

A subsidiary, subsidiary company or daughter company is a company that is owned or controlled by another company, which is called the parent company, parent, or holding company. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a government or state-owned enterprise. In some cases, particularly in the music and book publishing industries, subsidiaries are referred to as imprints.

Control, or controlling, is one of the managerial functions like planning, organizing, staffing and directing. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in a desired manner.

Contents

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 seasoned offering (SEO) of the parent equity.

A seasoned equity offering or secondary equity offering (SEO) or capital increase is a new equity issue by an already publicly traded company. Seasoned offerings may involve shares sold by existing shareholders (non-dilutive), new shares (dilutive) or both. If the seasoned equity offering is made by an issuer that meets certain regulatory criteria, it may be a shelf offering.

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.

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. [3]

See also

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References

  1. "equity carve-out - Business Definition". Your Dictionary. Archived from the original on September 17, 2013. Retrieved September 1, 2013.
  2. Investment Dictionary: Carve-out
  3. Bell, Dean; Benard, Tracy. "An Accounting Focus can Enhance Carve-out Values". Transaction Advisors. ISSN   2329-9134.