Module 25.4 LOS 25.n Carve outs, spin-offs and liquidations

Firm can decrease in size through divestitures, which usually involve a sale of a portion of a firm to an external party. Common methods are equity carve outs, spin-offs, split-offs and liquidations.

In liquidations, a firm, usually in bankruptcy proceedings, will break up and sell its assets piecemeal.

Equity carve outs create a new independent company where shares of a subsidiary are offered to outside shareholders through a public offering. This turns the subsidiary into a new legal entity with its out management and operations separate from the parent company.

Spin-offs are carve-outs except that shares are only offered to existing parent company shareholders. While the subsidiaries operations and management will be independent of the parent, the parent company does not receive cash from this type of transaction.

Split-offs­ are similar to spin-offs except that shareholders that wish to own shares in the new subsidiary must exchange shares they own in the parent company.

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