What Does Carve-out Mean?

1. Sometimes known as a partial spinoff, a carve out occurs when a parent compan
y sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rig
hts offering.
2. Where an established brick-and-mortar company hooks up with venture investors
and a new management team to launch an Internet spinoff.

In most cases the parent company will spinoff the remaining interests to existin
g shareholders at a later date when the stock price is much higher.

carve-out involves the partial sale of interest in a subsidiary of a larger comp

any, while still maintaining a controlling interest in the subsidiary. Generally
, the larger entity is referred to as a parent company, while the subsidiary is
identified as a child company. When a carve-out occurs, the parent company conti
nues to function according to the usual pattern, while some slight changes are u
sually involved in the operation of the child company.
The process of selling off a minority share in the child company is often accomp
lished with the issue of an IPO. The IPO, or initial public offering, provides t
he means for a fixed number of the shares of the child company to be offered for
public sale. By controlling the sale of the shares, it is possible to ensure th
at controlling interest in the company is retained. This means the child company
will still have the benefit of the resources of the parent, although the carve-
out often does create a reorganization of the executive and management branches
for the smaller company.
Once the initial carve-out is completed, it is not unusual for the parent compan
y to incrementally continue to release shares of the child company for sale. Ove
r an extended period of time, the control of the parent over the child will less
en. At the same time, the claim of the child company on the resources of the par
ent will also decrease. Eventually, controlling interest in the child will trans
fer to other hands, and the former parent company will often choose to escalate
the sale of any remaining interest.
A carve-out may occur as a means of raising necessary funds to enhance the gener
al operation in some manner. At other times, the carve-out may be utilized as a
means of financing a new product launch for the parent company. Often, the strat
egy is part of a long-term plan that will eventually change some important aspec
t of the way the parent company operates. However, that plan is generally not sh
ared with the general public, and often will take a number of years to be fully
implemented.