Equity Carve-Outs And Changes In Corporate Control

Abstract

This study proposes a corporate control hypothesis in which equity carve-outs facilitate changes in corporate control by providing an economical means to transfer control of corporate assets to bidders who will potentially create greater value.  Consistent with this hypothesis, a statistically significant 16% of the equity carve-outs in this study's sample are taken over within six years.  Those equity carve-outs subsequently taken over appear to be economically different from those motivated by other reasons.  Parent firms of equity carve-outs subsequently taken over display a significantly greater share price reaction to the announcement of an equity carve-out than do parent firms of equity carve-outs not subsequently taken over.  For those carve-outs subsequently taken over, an important factor contributing to parent firm gains is the relative size of the carve-out IPO.  There appears to be an optimal retention level of 10-50% for carve-outs motivated by the intent to facilitate a change in corporate control.