Increase in company value and market position as reasons for a carve-out
More and more companies are thinking about a spin-off of subdivisions and establishing them as independent entities. There are various motives for these so-called carve-out transactions. However, two aspects are always involved:
- increase in company value by focusing on core competencies and
- the resulting improved market position.
But do carve-outs really lead to the anticipated increases in company value? And how do companies that want to carry out carve-outs succeed in achieving the set goals in the best possible way? In short: What are factors of a successful carve-out transaction? These questions are addressed in the white paper "Dissecting public carve-outs: What are the dynamics of a successful transaction?" which was published by KPMG and The Edge in 2020. The study examined 45 carve-out transactions that took place in recent years on the capital markets in the USA, the EU, the UK, Australia, Japan, and India. As a result, some key success factors for the implementation of carve-outs can be identified.
Our Channel Manager Luisa Richwien conducted an in-depth interview with Ralf Pfennig, Partner in Accounting & Process Advisory and Head of Deal & Capital Markets Services at KPMG AG auditing company in Cologne, on the topic of success factors for a carve-out.
Carve-outs: Complex projects with positive effects
Luisa Richwien: Carve-outs have gained enormous popularity in recent years. A further wave of carve-outs is also expected in the period after the Covid-19 crisis. Carve-outs are complex projects that present companies with major challenges. Does the effort pay off in the end?
Ralf Pfennig: In any case, a carve-out is a complex undertaking. A company which was previously run by its parent company becomes independent and must be prepared for this in the best possible way. In the case of carve-outs on the capital market, there are also complex capital market or prospectus requirements, for example in the form of additional financial information that must be prepared and audited. Thorough advance planning is essential for this. As a rule of thumb, there is approximately one year between the first announcement of a planned carve-out transaction and the listing of the carve-out company on the stock exchange. Nevertheless, our empirical analysis shows that most carve-outs are successful. This can be seen in the share price development of the carve-out companies. The majority of the carve-out companies examined outperform comparable indices in this respect. However, the positive effect does not usually manifest itself immediately after the transaction, but only mid-term within several years.
Spin-off and IPO as types of a carve-out
Luisa Richwien: Not all carve-outs are the same. Are there certain types that have proven to be particularly effective?
Ralf Pfennig: In general, a distinction can be made between spin-offs and initial public offerings (IPOs).
In a spin-off, part of a company is outsourced. As compensation for the spin-off, the shareholders of the parent company receive shares of the newly created company in the form of a dividend in kind. This does not generate new capital but redistributes existing capital.
In an IPO, on the other hand, the carve-out company can actually generate new capital by combining the admission of the shares with a capital increase (primary offering).
It is striking that in the case of an IPO, the parent company usually retains the majority of shares in the carve-out company, whereas in the case of a spin-off, typically only a minority of shares remains with the parent company. The empirical study shows that carve-out transactions in which the parent company gives up its majority stake in the carve-out company tend to be more successful. The reason for this is probably that the newly founded company can act truly independently, i.e. it has full freedom to pursue individual strategies.
