Recently, corporate strategy has transitioned beyond its traditional focus on expansion to a focus on precision. Across industries, management teams have been re-examining their portfolio strategies and posing the tough question: What belongs at the core of our strategy, and what doesn’t?
The result is a dramatic rise in carve-outs. In fact, most carve-outs aren’t driven by strategic decks but by recognition that strategic focus is spread too thin across too many priorities. As a result, organizations are spinning out and divesting non-core businesses.
Carve-out transactions, as such, are not new. I can count many such transactions in nearly four decades of experience. The only thing that has changed is the pace and frequency. It makes sense, particularly as growth rates slow, capital gets more costly, technological advancements—digital and artificial intelligence—continue to accelerate and shareholders require immediate liquidity as much as superior investment returns.
For many firms, selling a business can become a quicker and riskier way to rethink and refocus strategy than seeking big mergers or transformations.
What a Carve-out Really Is
A carve-out involves separating the business, an asset group or an operation from its parent. Such a separation may take several different forms: a sale to either a strategic or private equity buyer, a spin-off to shareholders or an equity carve-out through the partial IPO.
At its core, a carve-out is a portfolio optimization decision. It clearly draws the line between what makes a differentiated company unique and what distracts them from it. If well executed, placing the asset with a better owner and creating a more coherent strategic platform for the remaining enterprise are likely to ensue.
Why Companies Choose Carve-outs
There are several factors contributing to the increased pace of carveouts. For one, companies face pressure to focus more keenly and exercise increased capital discipline; that means increased focus and investment only on those areas that are important. Secondly, carveouts can allow companies to overcome the value-deteriorating “conglomerate discounts” that can arise with conglomerate structures.
There is also a role for strategic agility. Focused businesses respond faster to changing markets and technology. There may also be an increase in favoring simpler structures due to considerations of increased regulation and risk. Both the board and shareholders have come to expect active portfolio management rather than just passive asset holding. The standalone business may also have an advantage in terms of accountability and stronger leadership incentives.
How to Decide Whether a Carve-Out Makes Sense
An effective carve out move, however, depends on much more than mere instinct. Here are the key steps to consider.
- Define the core: What the company has a sustainable right to win on and what it delivers better returns on than anyone.
- Building stand-alone economics: This involves excluding allocations in order to ascertain profitability.
- Map interdependencies: In this step, the shared services that include the separation or continued support of the shared systems, agreements, IP, personnel and information.
- Identify natural owners: Who are the best prospective owners of the asset?
- Stress-test structures and timings: Compare different sale, spin and equity carve-out options, including costs, tax effects and risks.
- Commit fully: Half-measures lead to perennial complexities and destroy value.
Execution Is Where Value Is Won or Lost
Most carve-outs’ success or failure is defined by their execution or strategy. Some critical priorities include identifying the specific perimeter for the transaction, developing carve-out finance and audits, eliminating or managing stranded costs within the parent, developing a disciplined transition service agreement, managing the separation with a focus on technology and data, maintaining customers and revenue, and effective communication.
For instance, before transition service agreements are extended or renegotiated, momentum is already lost.
Separation between technology and stranded costs is always underestimated. This is usually attributed to treating them as secondary workstreams, rather than integral parts of the transaction.
Common Pitfalls to Avoid
Carve-outs often struggle to progress due to the same problems. Assets and contracts may be defined too broadly, resulting in confusion and delaying the process. There is often underestimation when dealing with the complexities associated with technology and data. Moreover, the stranding costs may extend for a longer period than was assumed and may end up impairing the overall value.
Over-engineered transition service agreements are another relatively common pitfall, causing an organization to get locked into complexity when simplicity might be desired, rather than promoting an easy dissolution of an organization. Lack of communication with employees and customers can lead to loss of trust at exactly the wrong time. Inappropriate timing of tax and legal issues is another execution consideration.
Finally, there are misaligned leadership incentives, and looking to treat day one as a conclusion, or a finishing line, rather than a beginning to a new operating reality, can result in disruptive issues.
Why This Trend Is Structural, Not Cyclical
The forces that are driving carve-outs-forging new, durable headwinds of higher capital costs, digital and AI platform economics, regulatory fragmentation, activist pressure, industry specialization, and limited organic growth at scale accelerate these processes. Private equity appetite for carve-outs is still strong and reinforces this momentum.
Carve-outs are not an admission of failure.
They are a tool of strategic focus. When done with discipline, they sharpen strategy, unlock trapped value and position not only the parent but the separated business for stronger performance under the right ownership structure.
In an environment defined by uncertainty and speed, the ability to actively reshape an enterprise portfolio is no longer optional; it’s a competitive advantage.
