Divestitures rarely make headlines the way billion-dollar acquisitions do. But for insiders — particularly those in private equity, M&A advisory, and corporate development — they’re often the real needle-movers.
Why? Because shedding assets can do what a big buy rarely does: create real clarity.
Whether it’s simplifying the capital structure, refocusing on core businesses, or boosting market valuation by eliminating the so-called “conglomerate discount,” a well-structured divestiture can generate outsized value.
This post lays out the three primary corporate divestiture strategies: spin-offs, split-offs, and carve-outs. We cover their mechanics, benefits, tax consequences, and where they typically make the most sense.
A spin-off involves creating a new, independent public company by distributing shares of an existing division or subsidiary to the parent company’s existing shareholders. Each shareholder gets proportional ownership in the spin-off based on their current holdings.
There’s no cash involved, and no action required from shareholders. It’s a passive distribution — you wake up one day owning two stocks instead of one.
Source: dealroom
Spin-offs can be tax-free under Section 355 of the Internal Revenue Code if they meet specific conditions:
See IRS Code Section 355 for more on this.
Spin-offs are often the default strategy when capital isn’t immediately needed, and tax efficiency is key. They’re favored by companies looking to reduce complexity without triggering taxable events.
Unlike spin-offs, split offs introduce an exchange mechanism. Shareholders are invited to swap their parent company shares for shares in a new, independent entity.
There’s no automatic distribution. It’s a choice: hold the parent or swap into the spin-off.
| Feature | Spin-Off | Split-Off |
|---|---|---|
| Shareholder action | None | Required |
| Tax treatment | Potentially tax-free under Sec. 355 | Same, if conditions are met |
| Cash proceeds to parent | No | No |
| Shareholder flexibility | Low | High |
Split-offs can offer a better fit when management wants the market to self-select into the appropriate business.
Split-offs often feature an exchange ratio favorable to those who opt in, creating an incentive to participate. This can lead to an oversubscription scenario where only partial elections are honored.
A carve-out takes a different path: the parent sells a portion of a subsidiary to the public via an IPO.
It’s a way to tap public markets for cash without fully relinquishing control. The parent typically retains a majority stake (e.g., 80%) post-IPO.
Source: dealroom
Carve-outs trigger taxable events. The parent realizes capital gains or losses based on the difference between the IPO proceeds and their tax basis in the shares sold.
Tax structuring around carve-outs often includes:
GE HealthCare was spun off from General Electric, but only after a partial carve-out IPO of GE Capital Aviation Services (GECAS) to unlock value and deleverage the balance sheet.
Here’s how the three divestiture methods stack up:
| Feature | Spin-Off | Split-Off | Carve-Out |
|---|---|---|---|
| Shareholder action required | No | Yes | No |
| Tax-free potential | Yes (if Sec. 355) | Yes (if Sec. 355) | No (typically taxable) |
| Cash proceeds to parent | No | No | Yes |
| Control post-transaction | Parent retains none | Depends | Parent retains some |
| Complexity / regulatory burden | Low | Medium | High |
| New capital raised | No | No | Yes |
Key Insight: Spin-offs and split-offs are about capital structure and focus. Carve-outs are about cash.
For deal teams and board advisors, choosing the right structure isn’t just about tax — it’s about:
Private equity funds considering exit options for portfolio companies often look at:
This makes divestiture strategy not just a corporate finance topic, but a boardroom-level decision that intersects with investor relations, capital markets, and tax structuring.
The right structure depends on timing, need for capital, shareholder mix, and strategic goals.
As with most capital allocation decisions, the answer lives in nuance. There is no one-size-fits-all. But for firms willing to cut cleanly and think long-term, divestitures remain a serious lever for value creation.
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