Spin-offs, Split-offs, Equity Carve-Out, Split-up, Divestitures

The initial rationale for divestitures, spin offs, split offs, and split ups is the perceived undervaluation of some or all of the firm’s components. The firm may be undervalued for a number of different reasons, each of which lends itself to a different response.

• Unlocking hidden value - Establish a public market valuation for undervalued assets and create a pure-play entity that is transparent and easier to value
• Un-Diversification – Divest non-core businesses and sharpen strategic focus when direct sale to a strategic or financial buyer is either not compelling or not possible
• Tax and Regulatory Concerns - One or another of these options may provide a tax benefit, making it more favorable.
• Anti-trust
• Corporate Defense

In addition to the above, equity carve-outs can be used to achieve the following additional strategic objectives

• Cash infusion
• Preparation for complete separation

Spin-offs

Spin-off separates the divisions of a multi-division firm completely so that there can no longer be any internal transfers between the divisions and each division trades as a stand-alone entity after the spin-off. In a spin-off, the parent company distributes to its existing shareholders new shares in a subsidiary, thereby creating a separate legal entity with its own management team and board of directors. The distribution is conducted pro-rata, such that each existing shareholder receives stock of the subsidiary in proportion to the amount of parent company stock already held. 

Split offs

In a split-off, the parent company offers its shareholders the opportunity to exchange their parent company shares for new shares of a subsidiary. This tender offer often includes a premium to encourage existing parent company shareholders to accept the offer. A split-off is viewed as a sale for accounting purposes with a recognized gain or loss equal to the difference between the market price of the new split company's stock issued and parent company's inside basis in split company's assets. The split-off is a tax-efficient way for parent company to redeem its shares. 

Equity carve out

In an equity carve-out (a.k.a. IPO carve-out or subsidiary IPO) the parent company sells a portion or all of its interest in a subsidiary to the public in an initial public offering. The carve-out creates a new legal entity with its own management team and board of directors, and provides a cash infusion with proceeds distributed to the parent, subsidiary, or both. Equity carve out is first test to eventual spin-off of the subsidiary in future. This allows to establish a public market valuation for subsidiary's stock e.g. data-points like P/E etc for the subsidiary. If things are okay, parent company can decide to raise money for subsidiary by spin-off in future. Unlike spin-offs, the parent in an equity carve-out maintains a controlling interest in the carved out subsidiary so that some residual cross subsidization and investment inefficiency may persist even after the divestiture. 

Split-ups

The term split-up is defined as the division of a company into two or more publicly traded, comparatively substantial entities through one or more transactions.

Related Topics

Tracking Stock: Tracking stock are the common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company. Compared to divestitures, investors do not prefer tracking stock due to asymmetry of information.

References:

http://macabacus.com/restructuring/equity-carve-outs