How do carve-outs increase value? Definition, benefits, and real-world examples

Carve-outs help companies unlock value and focus on their core business by separating non-core parts. In 2024, carve-outs and spin-offs accounted for 4.2% of all deals, rising to 5.2% in the last quarter. They also represented 13.6% of the total deal value, surpassing the average of the past five years. This demonstrates that carve-outs are becoming an essential part of how companies restructure and grow in today’s rapidly evolving business landscape.

This article explores why companies choose a carve-out strategy, the benefits they provide, and real-world examples of successful carve-out transactions.

What are carve-outs and how do they work?

A carve-out is a business strategy where the parent company sells or separates a specific business unit, such as a division, product line, or subsidiary, into a new, independent entity. This separated entity may be sold, spun off, or listed on a stock exchange, with both the parent company and new investors often retaining some level of ownership or control.

In simple terms, a carve-out is like cutting a piece out of a larger company to create a smaller business that can operate independently or be sold to another company.

Carve-outs are commonly used in mergers and acquisitions (M&A) and divestiture strategies when a company wants to focus on its core business or raise capital. They allow the parent company to:

• Streamline operations
• Unlock the value of underperforming or non-core assets
• Prepare a business segment for sale or public offering
  

For buyers, carve-outs can be attractive because they offer access to proven products, teams, or markets without acquiring the entire parent company.

Here’s a simple comparison of carve-outs and other common restructuring methods:

Carve-outs are complex but valuable tools in strategic planning, particularly in corporate restructuring and M&A. When done right, they allow the parent company to focus on core business operations while unlocking value from the carved-out business.

Types of carve-outs

Carve-outs come in various forms, depending on what a company wants to achieve — whether it’s raising capital, improving focus, or separating non-core assets. Below are the most common types of carve-outs:

1. Spin-off

In a spin-off, a company separates a business unit and creates a new, independent company. Instead of selling it, the parent company gives shares of the new business to its current shareholders. The spun-off company gains full control over its strategy and operations. Spin-offs are often used when the parent believes the unit will perform better independently.

2. Equity carve-out

The parent company transfers shares by selling a minority interest in the new entity through an initial public offering (IPO), while retaining a controlling interest and access to capital markets.

3. Asset carve-out

In an asset carve-out, the parent company separates and transfers specific assets (such as equipment, intellectual property, or customer contracts) into a new structure. This move often sets the stage for a future sale, joint venture, or internal restructuring, allowing the company to focus on its core business.

4. Management buyout (MBO)

A carve-out may also take the form of a management buyout, where the leadership team of a division purchases it from the parent company, usually with the help of private investors. This gives the management team full ownership, enabling them to run the business independently.

5. Joint venture carve-out

In a joint venture carve-out, a company partners with another firm by contributing a business unit or assets to create a jointly owned new entity. This allows both parties to share risk, expertise, and profits while entering new markets or developing new offerings.

6. IT carve-out

An IT carve-out involves separating technology systems, platforms, or infrastructure, typically during larger business separations. This ensures a smooth transition of digital operations.

7. Data carve-out

A data carve-out isolates and transfers specific datasets or information, often for compliance, data privacy, or to support a broader carve-out or divestiture.

8. Corporate carve-out

Corporate carve-outs involve separating an entire division, business unit, or subsidiary from the parent company. This can lead to a spin-off, sale, or standalone entity, generally aimed at unlocking value, reducing complexity, or enabling both businesses to pursue different strategies. 

Carve-outs vs. divestitures: What’s the difference?

While both divestitures and carve-outs involve separating part of a business, they differ in structure, purpose, and ownership outcomes. Here’s a quick comparison to clarify the distinctions:

In short: a carve-out is like stepping back while maintaining a hand on the business. A divestiture is walking away completely.

 Examples of carve-outs

Here are several examples of carve-outs from major companies across different industries.

General Electric and Synchrony Financial (2014) 

In one of the largest carve-outs in U.S. history, General Electric (GE) separated its consumer finance unit, Synchrony Financial, through a two-step process. First, GE launched an IPO in 2014, selling 15% of Synchrony shares. Then in 2015, GE completed the separation through a tax-free exchange offer, allowing shareholders to swap GE shares for Synchrony shares at a discount. 

GE’s goal was to focus on its industrial core and reduce exposure to financial services. Synchrony became a stand-alone savings and loan holding company following Federal Reserve approval.

AstraZeneca Antibiotics Carve-Out (2015)

In 2015, AstraZeneca carved out its early-stage antibiotic R&D into a new standalone company with a $40 million investment. The move affected about 95 employees at its Massachusetts site, some of whom transitioned to the new venture. 

The spinout focused on AstraZeneca’s early antibiotic pipeline, including AZD0914, a Phase II candidate for gonorrhea. CEO Pascal Soriot had flagged antibiotics as non-core, aligning with a broader industry shift away from low-margin anti-infectives. The carve-out excluded marketed drugs like Merrem, Synagis, and the newly approved Avycaz.

Johnson & Johnson and Kenvue (2023)

In 2023, Johnson & Johnson completed the separation of its Consumer Health division, Kenvue, through an exchange offer. This followed Kenvue’s IPO in May, where 10% of the company was listed on the NYSE under the ticker KVUE. In the second step, J&J offered shareholders the option to exchange their J&J stock for Kenvue shares at a 7% discount, in a tax-free transaction. 

The exchange offer covered up to 80.1% of Kenvue shares, with the remaining shares distributed as a dividend if not fully subscribed. The deal allowed J&J to sharpen its focus on its core Pharmaceutical and MedTech segments, while Kenvue became a standalone company with iconic brands like Tylenol, Band-Aid, and Listerine. The carve-out impacted more than 1.5 billion shares and marked one of the largest healthcare separations in recent history. 

When and why companies choose carve-outs

Companies typically opt for carve-outs for the following reasons:

1. Unlock hidden value
   Separating a non-core business can reveal untapped potential, enhancing the company’s overall value.
2. Focus management attention on core operations
   Carve-outs streamline leadership efforts in primary business areas.
3. Raise capital
   Selling a division or subsidiary generates funds for investment or other needs.
4. Reduce debt or improve the balance sheet
   Proceeds from a carve-out can be used to pay down liabilities.
5. Enhance operational efficiency and agility
   Independent units often move faster and innovate more easily.
6. Enable better strategic partnerships or joint ventures
   Carve-outs can attract partners interested in specific businesses.
7. Respond to regulatory or antitrust requirements
   Sometimes, divestitures are necessary to comply with laws.
8. Simplify the company structure and improve transparency
   A clearer organization aids investors and management alike.
9. Provide clearer investment opportunities for shareholders
   Separate entities allow investors to choose their preferred exposure.
10. Accelerate growth in the carved-out entity
    Independence can empower the unit to pursue new markets and strategies.

For example, eBay spun off PayPal to enable faster growth and greater agility in the payments business, allowing each company to focus on its core strengths. 

Similarly, Hewlett-Packard separated into HP Inc. and Hewlett-Packard Enterprise, improving operational focus and making it easier for investors to understand and value each business independently. 

Another example is Kraft Foods splitting into Kraft Heinz and Mondelez International, unlocking value by creating two focused companies tailored to different markets.

Key takeaways

• A business carve-out is a strategy where the parent company sells or separates a subsidiary or business unit into a new, independent entity.
• Carve-outs are frequently used in mergers and acquisitions (M&A) and divestiture strategies when a company wants to divest non-core assets or raise capital. They allow the parent company to transfer shares of the carved-out business to external investors or distribute ownership among existing shareholders.
• Carve-outs help improve management focus, operational efficiency, and agility by creating independent entities.
• Carve-outs can raise capital, reduce debt, and simplify corporate structures for better transparency.
• Different types of carve-outs include spin-offs, equity carve-outs, asset carve-outs, management buyouts, joint ventures, IT carve-outs, and data carve-outs.
• Carve-outs differ from divestitures mainly in ownership retention and strategic goals.
• Companies choose carve-outs to accelerate growth, meet regulatory requirements, and attract better partnerships or investments.
• When done right, carve-outs can lead to stronger, more focused businesses and better shareholder returns.