equity carve-out


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Equity Carve Out

The act or process of a company making an IPO on one of its subsidies without fully spinning off. During an equity carve-out, the parent company becomes majority shareholder and only offers a minority share to the market. This gives the subsidiary a degree of autonomy (such as its own board of directors) while still retaining access to resources at the parent company. Most of the time, an equity carve-out ultimately results in the parent company fully spinning off the subsidy. It is also called a partial spin off.
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equity carve-out

The initial sale of common stock by a corporation of one of its business units. The initial public offering generally involves less than the entire amount of the stock in the unit so the parent company retains an equity stake in the subsidiary. An equity carve-out is sometimes followed by a distribution of the remaining shares to the parent's stockholders. Also called carve-out, split-off IPO.
Case Study Phillip Morris's 2001 equity carve-out of a portion of its ownership in subsidiary Kraft Foods resulted in what to that time was the second largest initial public offering in U.S. history. The $8.7 billion raised from the issue of 280 million shares was second only to the prior year's $10.6 billion initial public offering of AT&T Wireless tracking stock by AT&T. Demand for the Kraft issue was strong enough to allow the managers, Credit Suisse First Boston and Salomon Smith Barney, to increase the issue price to $31 per share from an earlier estimate of $27 to $30. Kraft, owner of well-known products including Maxwell House coffee, Post cereals, and Planters peanuts, was wholly owned by Phillip Morris prior to the IPO. Subsequent to the carve-out, Phillip Morris held slightly less than 50% of Kraft's class A common stock but controlled nearly all of the firm's voting shares. Proceeds from the stock issue were to be used to reduce Kraft's immense debt, which was incurred when the company in late 2000 purchased Nabisco Holdings for nearly $20 billion.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Our objective is to explore the IPO price-setting process, specifically, how underwriters treat public information throughout the pricing period, with a comprehensive data set of equity carve-outs (ECOs) to gain new insights on the efficiency of IPO pricing.
Equity carve-out structures actually offer executives a nice trade-off between risk and reward.
Our primary test examines whether the change in operating performance from before to after the equity carve-out relates to the amount of ownership retained by the parent company.
The trend to strategic restructuring Financial reasons Strategic reasons Spin-offs Carve-outs 1988-90 88 12 100% = 17 10 1994-96 50 50 26 15 1988-90 80 20 1994-96 53 47 Major spin-offs, carve-outs, and tracking stocks: 1988-96 Return to shareholder, percent Parent [1] Sample size [2] Spin-offs 18.2 79 S&P 500 17.5 Equity carve-outs 22.1 46 S&P 500 16.9 Tracking stocks 21.4 16 S&P 500 21.5 Market Index Subsidiary [1] Sample size [2] Spin-offs 27.1 78 S&P 500 16.3 Equity carve-outs 23.8 67 Russell 2000 11.0 Tracking stocks 19.2 23 S&P 500 21.0 (1.)Total return to shareholders based on two-year compound annual growth rate.
(We briefly discuss this issue in a subsequent section.) Thus, it is possible that share overhang may be systematically different for equity carve-outs as opposed to traditional IPOs.
Rivals of parent firms exhibit negative stock price reactions to equity carve-out announcements.
In the past decade, hundreds of corporations have used tracking stocks, equity carve-outs, and spin-offs for this purpose.
To test the response of investors to equity carve-out announcements for the sample, the mean announcement returns of the parent firm around the filing date are estimated.
A subset of the sample was then created, comprising companies that had completed multiple equity carve-outs and could be said to view them as an integral part of their operating strategies (see Appendix on page 172 for a detailed description of the companies in this subset and how they performed).
While the economic benefits of leveraged transactions have been studied extensively (see, for example, Jensen, 1989), there has been somewhat less investigation of equity-based restructurings, such as spin-offs, equity carve-outs, and dual-class recapitalizations.
Of the 37 divestitures with publicly traded parents, nine were created through a spin-off and 28 through an equity carve-out.