Using very little equity, a leveraged buyout can be used to finance the purchase of a company or a portion of one. Although the purchase is made with cash, a significant amount of the offered cash is financed by substantial debt. The borrower is the company or segment being purchased, and its assets serve as collateral for the debt used to pay for the purchase.
The sale of a portion of the business is required for an equity carve-out. The public buys shares in the new business in an initial public offering. Most of the time, the parent company keeps most of the stock in the carved-out new company and only sells some of it. Depending on how the deal is structured, either the parent company or the carved-out company—or both—may receive the cash from the sale of the carved-out company's shares in the equity carve-out, which is a type of equity financing.
The act of selling or otherwise disposing of an asset is called "divestment." A company can complete a divestiture in several ways, but selling equipment and leasing it back is not one of them because the equipment is not being sold when it is leased back. This scenario most closely resembles a leveraged buyout. Using very little equity, a leveraged buyout can be used to finance the purchase of a company or a portion of one. Debt is used to finance a significant portion of the offered purchase price. The borrower is the company or segment being purchased, and its assets serve as collateral for the debt used to pay for the purchase. Almost always, the involved business unit becomes a private company.
A company may decide to sell a division to fund the leveraged buyout. A leveraged buyout, on the other hand, can be used to acquire an entire business. The current management may or may not be the division's or company's buyers.
In an equity carve-out, a portion of the company is sold to the public in an initial public offering. Equity financing can take the form of an equity carve-out.
BigCo's goals would be best accomplished through an equity carve-out. In an initial public offering, the new company's shares would be sold to raise new capital. Because the parent company typically only sells a portion of the stock in the carved-out new company, BigCo could also keep majority control of the new company. BigCo can reward managers based on the performance of the stock because it is the majority shareholder in the new company. This can be an incentive to recruit and retain managerial talent.
This is a spin-off, also known as a divestiture. A spin-off is characterized by the creation of a new, distinct business and the issuance of new stock to the original company's shareholders in the spun-off entity.