Exploring Exclusions in Business Tactics: Crucial Terms and Illustrative Cases

In the corporate world, companies often find themselves in situations where they need to divest from certain business units or subsidiaries. Two popular strategies for achieving this are carve-outs and spin-offs.

A carve-out precedes a spin-off, allowing the parent company to maintain control while gaining strategic benefits. The parent company usually retains a controlling interest in the new company created through a carve-out. This approach offers a cash inflow to the parent company, as well as flexibility for future strategic decisions, including potential full separation.

In contrast, a spin-off does not offer any cash benefits to the parent company. Instead, it involves the company divesting a business unit by making it a standalone company. The business unit spun off becomes an independent company with its own shareholders, and shareholders now hold shares in two companies. To be tax-free for the final ownership structure in a spin-off, the parent company must relinquish 80% or more of control.

An example of a carve-out can be found in Robert Bosch's sale of its Brake Components business to AEQUITA. The exact date is not specified, but it likely occurred between 2020 and 2025. The new standalone company created through a carve-out has its own board of directors and financial statements, and the parent company provides strategic support and resources to the new company.

Carve-outs offer a middle ground between a full divestiture and a spin-off. They allow a company to explore non-core assets without full divestiture, while a spin-off does not offer any cash benefits to the parent company. Companies may choose a carve-out over full divestiture due to the integration of a business unit, making its complete sale difficult without affecting its stability.

In an equity carve-out, a company sells shares in a business unit, with the ultimate goal of full divestiture but not immediately. This process involves an initial public offering (IPO) to establish the subsidiary as a standalone company. In a carve-out, shares in the subsidiary are sold to the public through an IPO, allowing the parent company to receive cash for the shares it sells, even if it believes a single buyer for the entire business is unavailable or if it wants to maintain some control.

In summary, carve-outs and spin-offs are two strategies companies use to divest from non-core assets. Carve-outs offer a cash inflow and flexibility, while spin-offs provide a tax-free option for the parent company if it relinquishes 80% or more of control. Both strategies have their advantages and disadvantages, and companies must carefully evaluate their motivations and potential future impacts before making a decision.