Understanding Carve-Out Deals
By Rob Coursey, Managing Director, CPA
What is a Carve-Out?
In general business terms, a carve-out refers to the process of separating a specific portion or asset of a company from its overall operations. It involves isolating a particular segment, division, or subsidiary and treating it separately from the parent company. This separation can occur for various reasons, such as strategic restructuring, divestiture, or the creation of a new entity.
Carve-outs are commonly executed to create distinct business units that can operate independently or to facilitate the sale or investment in a specific part of the company. By isolating a carve-out, the parent company can focus on its core operations while allowing the separated entity to pursue its own objectives or attract potential investors.
Carve-outs often involve financial, legal, and operational complexities. They may require the creation of separate financial statements, establishing independent management teams, and defining the rights and responsibilities of the carve-out entity. Additionally, legal agreements and contracts are typically drafted to address the relationship between the parent company and the carve-out, including any ongoing support or services provided by the parent.
Overall, carve-outs are a strategic tool used by businesses to streamline operations, unlock value, or optimize specific business units within a larger organization.
Examples of Well-Executed Carve-Outs
Example #1 - General Electric (GE) and GE Capital
In 2015, General Electric (GE) announced its strategic decision to shrink its financial services division, GE Capital, and focus more on its industrial businesses. As part of this strategy, GE embarked on a series of divestitures to reduce the size and complexity of GE Capital.
In a carve-out deal, GE agreed to sell its Commercial Lending and Leasing business, which included various lending and leasing operations across industries such as healthcare, aviation, energy, and real estate, to the financial institution, Wells Fargo.
The carve-out involved separating the Commercial Lending and Leasing business from the rest of GE Capital's operations, including establishing separate financial statements, legal entities, and operational structures for the divested business. It required careful consideration of regulatory approvals, transferring customer relationships, and migrating technology systems.
The transaction was completed in 2016, with Wells Fargo acquiring the assets and assuming certain liabilities of GE Capital's Commercial Lending and Leasing business. This divestiture allowed GE to reduce its exposure to the financial sector and concentrate on its core industrial businesses.
The carve-out deal between GE and Wells Fargo exemplifies how a company can strategically carve out a specific business division or segment, separating it from the parent company and selling it to another entity. Carve-out deals of this nature enable companies to streamline their operations, shed non-core assets, and refocus their resources on their core business areas.
Example #2 - PayPal and eBay
Another notable example of a well-executed carve-out is the separation of PayPal from its parent company, eBay Inc., which took place in 2015. PayPal, originally acquired by eBay in 2002, had become a significant player in the online payment industry. However, as both companies evolved and their business models diverged, eBay decided to spin off PayPal into a separate entity through a carve-out process.
A spin-off and carve-out both involve separating a business unit or assets from an existing company, but there are some key differences between the two.
In summary, a spin-off involves creating a new, independent entity separate from the parent company, while a carve-out refers to an exception or exclusion within an existing agreement. Spin-offs aim to achieve independence and focus for a specific business unit, while carve-outs address specific provisions or arrangements within an existing agreement.
The separation of PayPal from eBay was well-received by investors and the market, and it proved to be a successful carve-out for several reasons:
1. Strategic Focus: PayPal and eBay had distinct strategic objectives, and separating the two entities allowed each company to focus on its core business. PayPal could concentrate on expanding its payment solutions and digital wallet services, while eBay could focus on enhancing its online marketplace platform.
2. Financial Independence: The carve-out provided PayPal with greater financial independence, allowing it to pursue its growth initiatives, make strategic investments, and access capital markets more directly. It enabled PayPal to optimize its financial structure and implement independent financial reporting.
3. Investor Interest: The carve-out generated significant investor interest, with PayPal's stock performing well following the separation. The increased transparency and clarity of the standalone PayPal entity attracted investors who were specifically interested in the payment industry, thereby unlocking additional value for shareholders.
4. Operational Continuity: During the carve-out process, meticulous attention was given to ensuring operational continuity and minimizing disruption to customers and business partners. This included managing the transition of technology systems, contracts, and customer relationships to the new standalone entity.
Overall, the carve-out of PayPal from eBay exemplified effective planning, execution, and communication, resulting in a successful separation that allowed both companies to thrive independently in their respective markets.
Generally, carve-outs and spin-offs are strategic actions undertaken by companies to create value, refocus resources, and enable separate entities to pursue their own independent strategies and growth opportunities. These transactions require careful planning, execution, and consideration of legal, financial, and operational aspects.
For more information or assistance with your current transaction activity, contact:
Rob Coursey, CPA
Tel: +1 708 248 5304