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Chapter 17. Other Restructuring > Equity Carve-outs (Spin-out IPOs)

Equity Carve-outs (Spin-out IPOs)

In this scenario, an IPO is made of some of the parent company's shares in its subsidiary. In practice, this is a sale of existing shares which are being listed for the first time. In many cases, according to the change in the ownership structure as a result of the transaction, the spun-off company may cease to be consolidated in the parent company's statements. The subsidiary's statements are now provided to the financial community separately, thus allowing it to be monitored separately. One of the direct implications is that the compensation packages of the subsidiary's employees can be more easily tied to the value of the subsidiary. The existence of a separate share also facilitates a full sale of the company's holdings in its subsidiary.

This mechanism is very similar to the spin-off in that the subsidiary's shares become traded. The main differences are in the economic nature of the actual change: In the case of a spin-off, the parent company receives no proceeds from the spin-off, whereas in this case the company receives cash proceeds; in a regular spin-off, the parent company's shareholders receive shares in the subsidiary whereas here their holdings in the parent company include a larger cash component (the IPO proceeds), but no direct holdings in the subsidiary. In most cases, the parent company also retains control of the subsidiary's assets and management. Similarly to a divestiture of parts of the company, the parent company receives cash for its shares in the subsidiary, but unlike regular sales, in which ownership is typically sold in full and control is transferred, in a spin-out the proceeds are derived from a sale made on the stock exchange, with ownership usually being retained. Spin-outs are sometimes combined with full spin-off, or are followed by a spin-off of the remaining shares to the parent company's shareholders.


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