There are a wide range of financial instruments to raise capital for young companies that want to “go public." These investment vehicles include traditional IPO filings, SPAC and De-SPAC transactions and direct listings. For established corporations in need of cash infusions for strategic reasons, there are other innovative tools like carve-outs and spinoffs to take advantage of changing market trends or divestiture for any number of reasons.
What does that look like? A corporation will use a carve-out to sell a part of its business to another company or issue an IPO on a stock exchange. While the new company normally operates independently, because of its history, the parent company may retain some influence on specific operations.
In a spinoff, however, the parent company creates an entirely separate publicly traded entity from a subsidiary or business unit. The parent company then distributes those shares to its shareholders, who own parts of both companies. Both approaches involve several essential steps that might include IPO filings, SPAC and De-SPAC filings, and SEC filings.
There were 9,155 carve-outs worldwide in 2021 valued at more than $2.3T. The U.S. market share accounted for 1,433 transactions valued at $891B. As with transactions across all financial vehicles worldwide, there were sharp drops in carve-outs, spinoffs and M&A filings in 2022. In addition, during this time, many companies had to navigate a completely new way of doing business with a remote workforce.
Several crucial international market trends were driving such divestments, including supplying the growing energy needs of emerging nations and reorganizing corporations to manage climate change regulations.
Why companies use carve-outs
Companies use carve-outs to cope with dynamic changes in their respective markets. The scope and complexity of such transactions require careful review and planning to ensure current shareholders are protected and their brand remains unblemished. The reasons companies divest are manifold, including:
- Selling a business unit that’s saddled with old technology or draining corporate resources
- Eliminating nonstrategic units to concentrate on its core business
- Enhancing its balance sheet
Sometimes a company uses a carve-out because it knows a division’s “hidden value” and understands it can attain higher values for the unit in the IPO market. It’s a great example of the “addition by subtraction” concept that requires solid M&A filing expertise. For example, PayPal split from eBay in 2015, which freed it to invest in and use new technologies apart from eBay’s corporate constraints.
The pros and cons of carve-outs
The pros
- Raises cash from non-core assets
- Promotes more operational flexibility
- Improves transparency for reporting and investment decisions
- Faster and simpler than using IPOs, De-SPACs or direct listings
- Allows for a cash infusion for the parent company
- Provides an opportunity to retain some measure of control
- Allows parent and new companies to focus on their respective core business
- Allows the market to determine the true value of each entity
- Creates new opportunities for strategic partnerships and new investors
The cons
- Requires deep legal and tax expertise/experience to execute
- May cause temporary disruptions for customers and staff
- Dilutes ownership despite retaining control
- Potential loss of synergies and combined strategic value
- Dilutes talent pool and expertise levels
- Raises regulatory scrutiny
- May expose the new carveout to more risk in sudden economic downturns
Relevant case studies
Carve-outs have a rich history of success that bodes well for investors of all types across the globe. Since many of the downsides for carve-outs can be mitigated with proper planning, the market is poised to reap the full benefits of these instruments in 2023, assuming recent bank failures don’t spread any contagion to major financial institutions. Here are a few excellent examples of well-executed spinoffs and carve-outs.
Porsche
Vaunted automaker Porsche owned 50% of the Volkswagen Group. Since Porsche wanted to raise cash and lower its debt profile, it spun off its manufacturing business circa 2007, named it Porsche AG, and reorganized the rest of the company into Porsche SE, a holding company.
This gave the AG manufacturing company the freedom to concentrate on building their legendary sports cars without being hampered by the corporate demands of Volkswagen.
In September of 2022, the Porsche Group continued down the road to independence when it issued a 78B Euro IPO on the Frankfurt Stock Exchange - Europe’s largest-ever IPO in terms of market capitalization.
Mobileye
As one of Israel’s most successful high-tech companies, Mobileye developed advanced driver assistance systems (ADAS) for the automotive market. In 2015, Mobileye went public and spun off its mapping and navigation business into a new entity called HERE Mobility to gain more flexibility to compete in the dynamic ADAS market. This move also allowed the parent company to raise more capital to fund its growing R&D budget. Intel subsequently purchased Mobileye in 2017 for $15B and based on the strength of the burgeoning ADAS market, Intel decided to take Mobileye through another IPO in October 2022 - which raised another $861M.
Bausch + Lomb
Canadian eyecare products manufacturing giant Valeant acquired Bausch and Lomb for $9B in 2013. Since Valeant was more interested in Bausch’s contact lens business, it decided to spin off Bausch and Lomb's surgical instruments and prescription drug components. This allowed the parent company to concentrate on its core market while letting Bausch and Lomb focus on the contact lens business. This approach also allowed both entities to streamline operations worldwide, making both clear leaders in their respective markets today.
In May 2022, Bausch and Lomb issued an IPO of 35M common shares priced at $18/share on the NYSE and Toronto Stock Exchange (TSX) under the ticker symbol “BLCO.”
How carve-outs mitigate the effects of bear markets
Depending on whom you ask, a “bear market” can mean different things to different investors. People who “short” stocks (bet the stock’s price will fall) love bear markets since it means their short-term investment strategies are timely. Standard-issue investors, however, fear bear markets because they normally depend on value increases over time. Sometimes the Bulls win, and sometimes the Bears take center stage.
Generally, a “bear market” is an extended decline of 20% or more in stock prices across all market sectors. Although there were 9,155 carve-outs worldwide in 2021, that growth softened when only 3,837 spinoffs were issued in the first half of 2022.
Despite an anemic 2022, carve-outs promise to make a roaring comeback in 2023 for a variety of reasons that hinge upon escalating global energy needs, meeting climate change requirements and a “return to core” philosophy gaining popularity in many board rooms today. While IPO and SEC filings, direct listings and M&A filings may decline in bear markets because of their specialized requirements, carve-outs/spinoffs continue to offer established corporations direct access to fresh capital, durable operational flexibility, effective indirect management control and exceptional opportunities for creating forward-looking strategic partnerships.
Toppan Merrill is here to help
The experts at Toppan Merrill are well-versed in carve-out and spinoff regimens and understand what document and regulatory needs apply to your specific M&A needs. To speak with one visit ToppanMerrill.com or call 800.688.4400.
