equity carve-out

Case Study Equity carve-outs—initial public offerings of subsidiaries—are not unusual. The Limited, Inc. carved out 18% of Abercrombie & Fitch Co. in a 1996 IPO. Two years later DuPont raised $4.4 billion by undertaking an equity carve-out equal to 30% of its oil subsidiary Conoco. Later the same year, CBS raised $3 billion in a carve-out of 16% of subsidiary Infinity Broadcasting. In August 1998 Cincinnati Bell sold 15 million shares in an initial public offering of subsidiary Convergys. Later that year Cincinnati Bell distributed to its shareholders the remaining 137 million Convergys shares. Equity carve-outs can offer several advantages to a company and its shareholders. In general, management of the parent firm believes the market value of the separated companies will be greater than the market value of the combined firm prior to the carve-out. Perhaps the investment community has been overlooking the real value of the subsidiary that produces good financial results but is overshadowed by the other parts of the firm. Another plus derives from a separately traded stock allowing the former subsidiary to use its own stock as a currency for acquisitions and management incentives. The new publicly traded company will have access to the equity markets that can provide capital for expansion.