Equity Carve-Out (IPO of Subsidiary)

The parent creates a new legal entity for the subsidiary, files an S-1 registration statement, and conducts an IPO selling a minority stake (typically 10-20%) to public investors. The parent retains majority ownership (80%+) and consolidates the subsidiary's financials. The IPO proceeds go to the parent company (primary offering) or to the subsidiary for growth capital. After the carve-out, the subsidiary has publicly traded stock with a market-determined valuation, even though the parent still controls it.

Carve-outs offer several benefits. Cash generation: the parent raises capital without giving up control. Valuation discovery: the public market sets a price for the subsidiary, which may reveal it's worth more than the market gave credit for within the conglomerate. Currency for acquisitions: the subsidiary can use its own publicly traded stock for M&A. Talent retention: the subsidiary can offer stock-based compensation tied to its own performance. Staged separation: a carve-out often precedes a full spin-off, giving the subsidiary time to build standalone operations.

In a carve-out, the parent sells a minority stake via IPO and retains control — it raises cash. In a spin-off, the parent distributes all subsidiary shares to existing shareholders pro-rata — no cash is raised but the businesses are fully separated. In a divestiture, the parent sells the entire subsidiary to a strategic or financial buyer — full separation with maximum cash proceeds. Companies often use a carve-out as the first step, followed by a spin-off of the remaining stake (tax-free under Section 355 if requirements are met).