Accounting Best Practices, Fifth Edition

11–5. Take a Business Unit Public

A company with multiple business units can have numerous problems related to them: Investors are unclear about the operating results of each unit, there may be significant differences in the perceived market value of some units, other units do not fall into the core business area, and unit managers have no incentive to improve their stock performance when their units have only a minor impact on overall corporate results. All of these issues can be addressed to some degree by taking a business unit public.

One approach for going public is the equity carve-out. Under this approach, a company creates a separate legal entity for a subsidiary, with a separate board of directors, and sells shares in it to the public through an initial public offering. This approach is usually taken when the unit has a high perceived value by the equity markets that will result in a high share price, and therefore considerable cash received by the corporate parent. Usually, the parent company retains some measure of ownership over the business unit.

Another option is the spinoff, which is a simple distribution of shares in the business unit to existing shareholders as a stock dividend. This approach is usually taken when the corporate parent wishes to completely sever its ownership of a business unit, frequently because it does not fit into the overall area of corporate focus.

Finally, the corporate parent can issue a tracking stock in a business unit. This requires no ...