Carve-outs are emerging as a powerful growth strategy for organizations in their M&A strategy to sharpen their focus, unlock hidden value, and undergo structural transformation while retaining some control. Successful carve-outs enable undervalued assets with the potential for realising their value while enabling public companies to divest slow-growth or non-core lines of business. Unlike divestitures or full asset sales, a carve-out enables a company to extract value from its subsidiary while still maintaining strategic influence. The process often signals a commitment to financial optimization and business transformation.
What Exactly Is a Carve-Out?
A corporate carve-out refers to a transaction where a parent company sells a portion of its business, either in the form of a PE transaction or even through the public market, creating a new standalone entity. The newly created firm (Carveco) maintains its own governance, financial reporting, and strategy, while the parent typically retains a majority or significant minority stake. This strategy is popular among large conglomerates, such as those in FMCG and technology, seeking to realign their portfolios with evolving corporate strategies. Once carved out, the Carveco now has the independence to chalk out its own growth path, which could be divergent from the erstwhile parent.
Why Companies Choose to Carve Out Assets
There are several compelling reasons for initiating a carve-out:
- Strategic clarity: In many situations, the carve-out is necessitated due to misalignment with the carved-out business with the core business of the parent company. This allows the parent to sharpen their focus and also allows the Carveco to set its own destiny. Carve-outs help companies narrow their focus by separating misaligned business units.
- Access to capital: Carve-outs generate capital through IPOs or sales while avoiding a complete exit. This is especially true when the Remainco (the parent that remains after the carve-out) is in need of capital to push for growth in its chosen markets and wants to avoid an M&A.
- Unlocking valuation multiples: Subsidiaries operating in high-growth sectors may command better market multiples when separated from slower-growing parent entities. The sum of the parts is sometimes more than the whole.
- Enhanced agility: Smaller, standalone entities are more nimble in addressing market opportunities. The Carveco will not need to adhere to the bureaucratic processes of the parent and can be more agile in tapping opportunities and creating more value through partnerships.
Take the case of Unilever, which recently carved out its tea business into a new company, Ekaterra, enabling sharper brand positioning in the growing wellness sector. Such restructuring allowed Unilever to focus more aggressively on its core health and beauty portfolio.
How Carve-Outs Create Mutual Value
Carve-outs are not zero-sum games. Done correctly, both the parent and the carved-out entity benefit through:
- Strategic alliances: Freed from association with the parent company, the new entity can now form alliances with competitors of the parent, opening new distribution channels and technology partnerships.
- Targeted financing: With independent governance and a potentially cleaner balance sheet, the carve-out can access capital markets under more favorable terms and attract investors aligned with its growth story.
- Customer and supplier appeal: Operational independence eliminates conflict of interest concerns for suppliers and customers, improving commercial relationships and potentially reducing procurement costs.
Interestingly, a study by Bain points out that carved-out business units can present an upside for their new owners if they can reduce complexity and implement agile ways of working
Maximizing Carve-Out Success
Implementation is where most value is captured (or lost). Companies that unlock the most value from carve-outs usually follow a rigorous execution strategy:
- Set dual-track goals: Establish financial and operational goals for both the parent and the new entity to ensure neither loses momentum during the transition. To be successful, carve-outs have to be a strategic imperative and not just a financial imperative.
- Build a PMO: A centralized project management office is essential for coordinating carve-out timelines, legal documentation, operational separation, and communication planning.
- Conduct operational readiness assessments: Identify infrastructure, systems, personnel, and resources the carve-out will need to operate independently. This includes IT systems, HR functions, supply chain, and more.
- Create clear roadmaps: Define responsibilities, handoff points, transitional service agreements (TSAs), and Day 1 readiness checklists.
- Empower the carve-out with digital transformation tools: For many companies, this is the moment to reset legacy systems. Streamlined SaaS platforms, modular ERP solutions, and cloud-native operations can all reduce costs and speed up agility.
Financial Optimization and Operational Resilience Post-Carve-Out
Beyond strategic positioning, carve-outs must also be sustainable. That’s where digital transformation plays a pivotal role: it helps firms assess cost structures, using peer benchmarking and industry comparisons to identify where support functions are oversized or inefficient. An oil and gas company might spin off its chemical division, which demands a different R&D cadence and margin profile, and support the transition with AI-driven forecasting or advanced business intelligence (BI) platforms. Modern finance functions in carve-outs often rethink their G&A (general and administrative) support entirely, opting for leaner structures and automation. For example, a finance team that previously relied on bespoke enterprise platforms might now switch to cost-effective cloud tools with integrated analytics.
The (Business) Culture War
Last but not least, culture can make or break carve-outs. According to a McKinsey study, 70% of the transformation processes fail due to cultural misalignments. Employees often resist change, and leadership must inspire rather than simply inform. Change stories, CEO visibility, and role modeling behavior can dramatically improve morale and engagement. The underpinning of managing the cultural issue is by creating and executing a clear and transparent communication process, wherein the leadership team at the Carveco continuously engages the employees in creating a positive narrative and improving the trust factor within the Carveco. The key elements that the communication policy needs to address is Fear, Uncertainty, and Doubt (FUD). Communication related to roles being eliminated must be accompanied, for instance, by roles being created.
Carve-outs, when executed strategically, go well beyond financial engineering: they are transformation catalysts. They help companies realign around core missions, inject fresh energy into lagging units, and unlock value for investors. However, carve-outs require precision: from roadmap planning and technology reconfiguration to cultural transformation and stakeholder management. With the right transaction strategy and execution plan, carve-outs can transform complexity into clarity, inefficiency into innovation, and stagnation into sustained growth and business transformation.
By Ameya Waingankar
