Definition: The Equity Carveout is the corporate strategy wherein the company sells a portion or a division in a wholly owned subsidiary through the IPOs and retain the full control over the management. Under this arrangement, limited shares are offered to the public, while the majority stake is retained by the parent company.
Usually, more than 50% shares are held by the parent company with the intent to exercise control over the management of the subsidiary, so formed. The parent company may distribute its shares either among the existing shareholders of the new company or list them on the stock exchange so that it could be purchased by the potential investors.
Another form of equity carveout is spin-off, but, however, both are different from each other. In the case of a spin-off, the shares of the spun-off company are distributed among the existing shareholders of the parent company, while in the case of equity carveout the shares are distributed to new potential investors.
Another difference between these two is, the equity carveout brings cash into the parent company whereas in spin-off no such cash is infused into the base company.
The companies adopt the equity carveout strategy to enhance the business value by disposing of the less profitable business undertakings and realizing cash that can be used in improving the core business activities.