Introducing Carve-outs: A New Corporate Mergers and Acquisition (M&A) Strategy in Difficult Times

During certain economic periods, particularly when conditions tighten and borrowing costs remain very high, it seems strange that M&A can persist. This is the function of corporate carve-outs.

Instead of businesses pursuing large-scale acquisitions, a growing number of businesses have chosen to divest non-core assets through this carve-out process. As this trend emerged and reshaped the M&A landscape, it has created some challenges and business opportunities for global law firms which advise global investors.

A corporate carve-out is when a company decides to sell or spin off part of its business, which normally involves selling a subsidiary, division or an established product line to other buyers or to the public via an initial public offering (IPO). The main purposes are to raise capital for the investors, reduce business debt and refocus on improving and expanding core operations.

For example, major multinational companies in recent years such as General Electric, Johnson & Johnson, and Vodafone have decided to undertake carve-outs to unlock shareholder value and simplify their existing business structures.

During economic downturn, where contractionary monetary policies are often in place and interest rates are high, financing new acquisitions is extremely expensive. That’s where carve-outs become a preference for businesses as an alternative to the traditional full-scale M&A. Buyers in these carve-outs, normally private equity firms or business competitors, are still keen on acquiring the target companies because they are typically well-established and profitable divisions, not to mention there is a discount in the risk compared to buying an entire company.

For the sellers on the other hand, they inherently benefit as well from the quick injection of capital and the benefit of streamlining the focus of their remaining business units.

From a legal perspective, corporate carve-outs are far from a walk in the park. They are among the most complex types of transactions. In contrast to the standard sale, corporate carve-outs require the separation of intertwined assets, contracts, and even their employees that have worked for years in the company. It’s like separating cheese from the top of a pizza. The longer the pizza has been in the oven, the harder the task will be; the more intertwined the business is, the harder the task will be for firms. To ensure a clean and perfect separation, lawyers need to coordinate across multiple practice areas to get the task done, including corporate, employment, tax and even intellectual property that the business has.

The most common key issues that often arise include transitional service agreements (TSAs). I know what you’re thinking, and this is not the airport security. TSAs are temporary agreements that allow the parent company to continue to provide services such as IT assistance, human resources or logistical supplies to the newly independent business while it is still slowly establishing its own functioning systems.

Matters get even more complicated in cross-border carve-outs. Different jurisdictions have different rules and regulatory bodies on a range of issues governing carve-out. For example, firms will play a critical role in harmonising employment transfers, data protection and even competition clearance in all of the affected jurisdictions to ensure a smooth transfer across the different markets.

Corporate carve-outs showcase the very important role of firms in conducting strategic due diligence. The buyers in this case not only need to assess the financial performance of the targeted carve-out business, but also its degree of operational independence from its parent company. In other words, investors are really keen to know one thing: can the new company stand alone and make a profit once separated? That’s the role of the teams of lawyers: to identify risks such as any shared intellectual property, joint contracts, or even hidden licensing restrictions that might affect or hinder the newly acquired company’s post-deal integration and operations.

In conclusion, companies look for different ways to maintain resilience and focus during times of economic uncertainty, one way is to divest non-core assets, offering a flexible way to adapt without overextending. This trend sends a clear message to aspiring lawyers: clients now expect lawyers to provide not only technical legal support, but also strategic and deep commercial insight into how structural changes can create opportunities and long-term value for clients.