Corporate Carve-Outs Gaining Momentum as Rest of IPO Market Stalls

The slowdown in the US initial public offering market is opening up opportunities for deals known on Wall Street as corporate carve-outs. These deals involve spinning off a company's division or subsidiary into a separate entity.

According to Dealogic, traditional initial public offerings in the U.S. last year raised the smallest amount in at least two decades. Three of the biggest deals of the year were carve-outs—companies spun out from parents, using a standard IPO sale rather than the stock distribution that often occurs in what is known as a spinoff.

It looks like the trend is continuing into 2023, with Kenvue Inc. recently filing for its planned initial public offering (IPO). Kenvue is the consumer health business unit of Johnson & Johnson, and the IPO is being led by Goldman Sachs Group Inc. and JPMorgan Chase & Co. The regulatory filing didn't reveal the target valuation for Kenvue, but a person close to the offering said it could raise $5 billion or more.

Given the current state of the markets and fears of a recession, more companies are considering divestitures. Investors view these carve-outs as more attractive than many of the IPOs that have come to market in recent years, as they are seen as mature businesses with solid profits.

According to David Oberst, a partner at Deloitte & Touche specializing in M&A transactions, companies will often take a close look at their portfolios during potential economic downturns in order to determine which assets are most essential to their business. He notes that some large companies are even considering divestitures (or "carve-outs") as a way to streamline their operations during challenging times.

Some standard spinoffs are still being released. For example, General Electric Co. has come out with GE 0.07%.

GE Healthcare Technologies Inc. recently started trading on the Nasdaq Stock Market. Under that deal, GE distributed one share of GE Healthcare common stock for every three shares of GE common stock its investors held.

IPOs in the U.S. raised $8.6 billion in 2022, far below the roughly $56 billion annual average over the past decade, according to Dealogic. Roughly 40% of that total came from three entities that fit the carve-out model: Mobileye Global Inc., Corebridge Financial Inc. and Bausch + Lomb Corp.

Many companies that were planning to go public last year postponed their offerings due to rising interest rates, which squeezed valuations. Big corporations are less likely to delay a spinoff for those reasons, since they don't need to actually sell shares. If they do a carve-out and do sell new stock, they can only sell a small portion of the business initially.

Intel's self-driving car unit, Mobileye, made its debut on the stock market in October. The company priced its shares conservatively, taking into account the risks facing the IPO market. So far, this decision has paid off, with Mobileye's shares trading at around $30 each, above the $21 IPO price.

Two of the three carve-outs from last year are trading below their listing price.

Corebridge Financial, the life-insurance and asset-management unit of American International Group Inc., priced its September IPO at $21 per share, below the expected range of $21-$24. The stock has been volatile since its debut, recently trading at around $20.

In May, Bausch Health Cos. sold shares of Bausch + Lomb for $18 each, which was below expectations. The recent trading price for Bausch + Lomb shares is around $16 each.