Corporate Carve Outs: Value Private Equity Firm Provides to Management
Are you continually investing energy and know-how into a division whose cash flow is being drained to invest in other business units? Have you considered purchasing your division to grow it with your own strategy? Do you think you could eliminate the cost of overhead and work leaner if only you could get out from underneath the canopy of your parent company? If you’re managing a business unit that fits this description, a carve-out could be right for you.
A corporate carve-out, also known as an equity carve-out, is a partial or full divestiture of a business, wherein the parent company strategically sells off shares or assets of an operating division. What drives a company to carve out? In this article, we’ll explore key factors that drive businesses to this solution, as well as look at what value a private equity firm can bring to those on the buying side of this transaction.
Why Companies Carve Out
Carve-outs come in several different varieties - specific assets, a portfolio of assets, or an entire business unit. However, there are only two main reasons why companies sell off pieces of their portfolio.
Raise Capital. The need for capital is a pretty straightforward reason to initiate a company carve-out. Carve-out sales generate cash the parent company can deploy elsewhere. This especially makes sense when they have higher growth opportunities in other parts of their business. When companies strategically carve out or divest a business, they can also focus their efforts on those higher growth opportunities to create more value overall.
Eliminate Non-core Business. Carve-outs create room for opportunity when dealing with a part of the business that is underperforming and/or no longer fits the core business strategy. For example, First Data Processing was a carve-out from First Bank System by George Dalton in 1984, which was merged with Sunshine State Systems to form the beginning of what is today, Fiserv. When a business is carved out and separated from its parent company, it has an opportunity to grow in a more beneficial direction.
The Value of a Private Equity Firm
Albeit an important strategic tool to drive competitiveness, carve-outs can be very difficult transactions to get right, and they often take a year or more to complete. Partnering with a private equity firm is often instrumental in a successful execution. Here are five ways a private equity firm adds value during a corporate carve-out.
Private equity firms can streamline the deal process and ensure clear communication, which frees up the management team to focus on post close strategy and execution plans.
While the management team focuses on continuing to grow the business, the private equity team is thoughtful and collaborative in driving inorganic growth.
Private equity firms are in the business of buying businesses. They have a keen eye for identifying opportunities to help your newly divested company grow.
The carve-out business is fully or partially integrated with the operations and management of the parent company. A private equity firm can help disentangle the business from its corporate infrastructure and can leverage its expertise and network to help it stand up on its own.
Private equity firms often provide the management teams the opportunity to own equity in the carved out company.
Carve Your Own Path
All successful corporations have a core operation. Nike sells athletic apparel. Hardees makes burgers. Ford makes cars. But, if Hardees suddenly started serving gelato which branched out into making their own gelato, they might be looking at a sector of business that no longer aligns with their core function. In other words, a carve-out could be in their future.
Corporate carve-outs can add immense value to both the parent company and the divested company if executed properly. Borgman Capital has a diverse portfolio of businesses and financial resources to help management teams considering a carve-out. Connect with us today and learn how we can help you identify opportunities and ultimately carve your own path.
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