Corporate Structure and Equity Carve-Outs

Equity carve-outs are a new type of corporate subsidiary which has many of the same features of traditional subsidiaries, but with some new innovative and unique twists.

In an article discussing the issue of equity carve-outs, Dennis Carey, with co-authors Patricia Anslinger, Kristin Fink and Chris Gagnon, points out that a corporate center is essentially a structure which allows a single, centralized body to bring value to its numerous individual business units. Entities such as operating companies, multi-business companies, holding companies, conglomerates and investment firms are all examples of this centralization which serves the needs of its subsidiaries. Equity carve-outs are a new way to structure a business on this model.

How Do Equity Carve-Outs Stand Out

When a public company decides to sell the common stock of a part of one of its divisions or subsidiaries using an initial public offering (IPO), you have what is known as an equity carve-out. Each one of these “carved-out” subsidiaries has its own unique board, CEO, and financial statements. The corporate parent supplies strategic planning, direction, and central resources.
Examples of companies who have taken this direction for their corporate structure are The Limited, Genzyme, and Enron, with several notable others. How has this innovation worked for these companies? Dennis Carey explains:

“We examined the performance of US equity carve-out subsidiaries from 1985 to 1995, in cases where 50 percent or more of each subsidiary's shares were retained by the parent. (We were interested only in those companies where the parent remained an operating center, not a loosely affiliated holding company.) Over a three-year period, the subsidiaries in this sample showed average compound annual returns of 20.3 percent 9.6 percent better than the Russell 2000 Index. Those companies that repeatedly sold stakes in subsidiaries fared even better. Three years after the carve-out, their subsidiaries showed annual returns of 36.8 percent. The parent companies themselves experienced average annual shareholder returns of 31.1 percent.”

Dennis Carey is able to conclude from this study that equity carve-outs are an excellent way to take advantage of growth opportunities while also improving shareholder value.

As one example, take Safeguard Scientifics: Between 1985 and 1996 this company gave birth to six new companies, with a resulting growth from $66 million in 1985 spiraling up to $1.9 billion in 1996.

Brave New Future for Boards and Management

We have entered a brave new world of corporate strategy, according to Dennis Carey in response to the corporate world’s compliance with the latest regulations coming from the Sarbanes-Oxley Act, (SOX.) Now that the adjustment to the new regulations has been successfully made, boards need to re-tool their strategies for success so that there is a new emphasis on human capital and creating better value for the shareholders of the corporation.

Increasingly, says Dennis Carey, it is growth, innovation and creativity that drive the agenda of the top executives. But boards do not function in a vacuum. On the contrary, although boards of directors set strategy and policy, it is management that of necessity must implement that strategy. Therefore, Dennis Carey continues, the boards that create good working relationships and partnerships with their management will find that their strategies will not be left behind on the drawing board, but will be implemented. This is a true formula for success.

Corporate Reform and Sarbanes-Oxley

In the wake of the passage of the historical Sarbanes-Oxley Act it is time for corporate boards in the United States to refocus their attention on developing new strategies for success.

Dennis Carey believes that for the most part boards have gotten past the initial struggle to comply with the new rules and regulations legislated by SOX, (Sarbanes-Oxley), and it is time for them to go forward into the future.

SOX forced corporate boards of directors to turn inward and adjust their practices to the new accounting compliance rules. Now that these rules have been digested Dennis Carey would like to see the next reform incorporating together human capital with long-term strategy.

Dennis C. Carey, Author of "CEO Succession"

In 2000 Dennis Carey authored the book, "CEO Succession: A Window on How Board Can Get It Right When Choosing a New Chief Executive". Co-authored with Dayton Ogden and Judith A. Roland, CEO Succession is an essential guidebook for anyone who cares about the quality of leadership in the corporate culture of America, and not just for board members or CEOs.

In CEO Succession Dennis Carey takes his readers on a guided tour of what the best practices are for empowering the corporate board of directors to be the force which ensures the consistent and steady flow of successful, enlightened leadership.

Dennis Carey, along with Dayton Ogden, draw on their own experiences working behind the scenes with CEOs and directors of the world’s most well-known and powerful companies. They also utilize personal interviews with corporate leadership so that the message of how corporate boards can implement the appropriate strategies and techniques to create a transparent planning process so that a seamless, smooth transfer of leadership of an organization can be accomplished.