Carve-outs1 seem too good to be true: a financial instrument that increases a company’s stock price without sacrificing control over a valuable business unit.
It turns out that they are too good to be true. An analysis of more than 200 major carve-outs in Europe and the United States during the past 12 years shows that around the time of the announcement only 10 percent of them raised the parents’ share price by more than 12 percent. During the 2 years after the transaction, most carve-outs actually destroyed shareholder value.2 There is one important exception, however: carve-outs that followed a clear trajectory to full independence (through a spin-off, for example) significantly outperformed typical S&P 500 companies (Exhibit 1).
In general, few carve-outs remain under the parent’s control. Even a minority IPO in a high-growth business brings transaction currency for acquisitions, equity funding for internal growth, and responsibilities to the shareholders, and over time these forces tend to reduce still further the parent’s control. After about five years, only 8 percent of carve-outs continue to exist as public companies clearly controlled by the parent (that is, in which the parent holds more than 50 percent of the shares)....