Academic journal article Quarterly Journal of Finance and Accounting

An Examination of the Long-Term Results of Acquired Carve-Out/spin-Off Combinations

Academic journal article Quarterly Journal of Finance and Accounting

An Examination of the Long-Term Results of Acquired Carve-Out/spin-Off Combinations

Article excerpt


US companies have used equity carve-outs (partial IPOs) as a reorganization tool for some time to unlock subsidiary values and to increase the parent's corporate focus or to create a pure play for the subsidiary. Generally, the offering proceeds are reinvested in the carve-out or are paid to the parent as debt reduction or a special dividend. We investigate the 76 acquired carve-out/spin-off combinations (COSOs) during the period from 1988 to 2012. Although there have been other long-term carve-out and spin-off studies, this is the first study to test hypotheses related to the long-term results of acquired COSOs and those that continue to exist.

The carve-out/spin-off combination has gained prominence since the Klein, Rosenfeld and Beranek (1991) study, which reports that carve-outs are part of a two stage process. In the Klein, Rosenfeld and Beranek (1991) sample period (1966-1983), only two of 52 carve-outs (3.85% of the sample) were subsequently spun off. For our sample period (1988-2006), 76 of 282 carve-outs (26.95% of our sample) were spun-off by their parents. We observe that for the sample period, COSOs have market adjusted carve-out ex-date returns of 21.46%; acquired carve-outs had 21.56% returns, and reacquired carve-outs had 18.35% returns (but not reported in tables).

COSOs benefit parent and investors in three main ways. First, given that COSOs such as Travelers and Conoco are the largest IPOs with only 20% of the company's shares offered, there may be an upward limit to offering sizes. Other notable acquired COSOs are Guidant Corp, Palm Inc. and Freescale Semiconductor. (1) The follow-on spin-off is tax-free if parents retain ownership of 80% in the subsidiary (26 US Code Section 355). (2) Also, the retained insider ownership creates overhang that reduces the impact of underpricing. Second, since most spin-offs distribute less than a 1:1 ratio of subsidiary to parent shares, many shareholders tend to sell fractional or odd-lot shares soon after a spin-off (Vijh 1994). However, carve-outs can establish markets for shares prior to spin-offs and reduce the potential for the subsequent sell-off of subsidiary shares (Thompson and Apilado 2006). Also, carve-outs allow parents to showcase their subsidiaries to prospective buyers (Klein, Rosenfeld and Beranek 1991). Leland and Pyle (1977) report that insiders, by retaining their shares, signal their firms' value to the market. Similarly, Loughran and Ritter (2002) show that insiders prefer to hold their shares to be divested later and then benefit from the potential market price increases. Third, similar to other carve-outs, COSOs increase parent company focus (reduce diversification) and to create a pure play in the subsidiary stock. The initial carve-out followed by a second divestiture event increases company focus when the combination carve-out reduces number of industries for the parent. In cases where the subsidiary trades as a separate entity, the combination carve-out provides a pure play. (3) This tends to unmask subsidiary values.

We extend the literature by testing four hypotheses related to long-term results for acquired COSOs: partial price adjustment, leaning against the wind, managerial discretion and pre-announced spin-offs. The implications are that investors can economically benefit from acquired COSOs. We observe that independent variables explain 38% of the variation in carve-out ex-date returns for acquired COSOs with pre-announced spinoffs.

Data and Analytical Methods


To be included in our study, a COSO had to meet two initial criteria. First, consistent with our definition of carve-outs, parents must retain 80% or more control in the subsidiary after the carve-out and must remain publicly traded entities. For the 1990 and prior period, we examined new releases for initial public offerings of subsidiaries. For the post-1990 period, we started with the list of carve-outs in Mergers and Acquisition Magazine. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.