Carveouts in M&A: Unlocking Value from Non-Core Business Units

In M&A conversations, carveouts have often been treated as the byproduct of larger strategy shifts—necessary, but messy. That’s a mistake. In today’s market, where both corporates and private equity firms are searching for sharper capital allocation and performance gains, carveouts aren’t just operational cleanups. They’re strategic value unlocks. When executed well, a carveout can surface hidden value, streamline governance, and create focused entities with stronger growth trajectories than the parent ever offered.

But that assumes these transactions are handled with rigor and foresight—which isn’t always the case. Too many carveouts fail to deliver because the separation strategy is reactive, not proactive. Sellers focus on shedding underperforming units without understanding their standalone potential. Buyers jump in for opportunistic price tags without mapping the operational lift needed post-acquisition. And yet, when managed with discipline, carveouts can outperform full-blown acquisitions in both IRR and EBITDA uplift.

In the current environment, the resurgence of carveouts is no accident. According to Bain & Company, carveouts accounted for 48% of all corporate divestitures in global M&A by value in 2023. That’s not a blip—it’s a clear signal that corporates are reprioritizing core focus, while PE funds are leaning into complexity premiums. Understanding how to structure, execute, and integrate these deals has become a must-have skillset across the transaction stack.

So what separates a successful carveout from a value trap? Let’s look at the deal rationale, buyer profiles, operational execution, and investment outcomes that actually move the needle.

Strategic Rationale for Carveouts: Aligning Divestitures with Shareholder Value

At the core of any successful carveout is one uncomfortable truth: a unit that might underperform within a conglomerate can outperform as a standalone business. The logic isn’t new, but the implications are often misunderstood. Just because a unit lacks synergy doesn’t mean it lacks potential.

The rationale extends beyond operational fit. For many public companies, shareholder pressure is forcing portfolio simplification. Elliott Management’s campaign against AT&T in 2019 is a case in point. AT&T’s subsequent spin of WarnerMedia wasn’t just about media synergy—it was about narrowing strategic drift and rebuilding investor trust.

Private equity sponsors view these inefficiencies differently. What looks like bloat to corporates looks like arbitrage to funds. Carveouts allow PE firms to acquire under-optimized assets at a discount, build them out with clean governance, and eventually exit at full-market multiples. When EQT acquired Nestlé Skin Health for $10.2 billion in 2019, it wasn’t just betting on skincare—it was betting on decoupling the business from a slow-moving parent and unlocking topline growth through independent strategy.

Still, not every carveout delivers. Misalignment between buyer strategy and asset fundamentals often leads to disappointment. The best returns come when divestiture strategy and buy-side ambition are in sync—and when both sides recognize the lift required to bridge that gap.

Private Equity’s Playbook for Carveout Success: Complexity as a Pricing Opportunity

PE firms love carveouts for a reason: they know how to monetize complexity. But the playbook isn’t about slashing headcount or flipping assets. The most effective carveout strategies focus on value engineering through operational reinvention, talent reshaping, and capital structure optimization.

Let’s start with what private equity really sees when it targets carveouts. Unlike corporate acquirers, PE funds are not put off by transitional service agreements (TSAs), stranded costs, or back-office gaps. In fact, these are viewed as leverage points. Funds like Advent International and Clayton Dubilier & Rice have repeatedly shown that if you can solve for execution risk, you can capture pricing inefficiencies others avoid.

Operational lift is just one lever. Another is governance overhaul. In many carveouts, legacy business units suffer from diluted accountability and unclear KPIs. PE firms bring sharper incentive structures and C-suite autonomy, which often drive rapid cultural transformation. One former Carlyle partner put it bluntly: “Most of our carveouts succeed because we actually let the CEO run the business—something they rarely got to do inside a conglomerate.”

Capital structuring also plays a quiet but potent role. Corporate balance sheets rarely optimize for risk-return at the business unit level. PE firms restructure carveouts with leverage that’s appropriate for the standalone’s cash flow profile—often improving ROE without strangling growth. According to PitchBook, PE-backed carveouts between 2018 and 2022 saw a median IRR of 22.4%, significantly higher than the 17.1% for platform acquisitions in the same period.

Yet even top-tier firms can misfire. The missing link is often integration strategy. A carveout can be operationally strong but fail to connect with adjacent portfolio assets, or struggle to integrate new digital systems. Firms that treat the post-deal period as a continuation of diligence—not its conclusion—are the ones that typically outperform.

Operational Complexity in Carveouts: Bridging the Execution Gap

Carveouts are rarely neat. While the headline deal might look clean, the operational unbundling is anything but. From stranded IT systems to shared service dependencies, executing a carveout demands not just transactional expertise but real-world execution muscle. This is where even experienced dealmakers can stumble. It’s not enough to identify value on paper; the actual separation plan needs to be airtight.

One of the most underestimated challenges is disentangling infrastructure. Business units rarely exist as fully discrete entities. They share ERP systems, HR platforms, procurement contracts, and even C-level oversight. According to PwC, more than 60% of carveouts face delays due to misalignment on separation readiness. The most successful deals, by contrast, begin with Day 1 operating models defined and costed into the valuation.

IT and data transitions are especially fraught. During the 2021 divestiture of IBM’s managed infrastructure services business (now Kyndryl), the company faced a massive replatforming effort to ensure both entities could operate independently. This involved not only technical separation but contractual renegotiation with dozens of cloud vendors. Kyndryl’s CFO later noted that 18 months of post-spin operational readiness was built into the carveout thesis from day one.

There’s also a human capital issue that gets too little airtime. Talent bleed is a very real risk. In many carveouts, the most valuable people don’t want to stay with the carved-out unit—they were loyal to the parent brand. Retention bonuses and leadership grooming need to start well before close. Otherwise, acquirers inherit shell entities with good assets but no muscle to run them.

To mitigate these risks, elite deal teams invest heavily in:

• Pre-close operational mapping of all dependencies and stranded costs.
• Early formation of a carveout transition office with both seller and buyer reps.
• TSA timelines with exit ramps tied to performance, not arbitrary dates.

This isn’t just good hygiene—it directly impacts value capture. A poorly executed carveout often sees synergy dilution, regulatory hang-ups, or post-deal write-downs that could have been avoided with better upfront discipline.

Evaluating Carveout Success: Metrics, Milestones, and Strategic Fit

The M&A industry has no shortage of buzzwords to describe deal quality. But when it comes to carveouts, success isn’t about synergies or cost cuts alone. It’s about stand-up stability, EBITDA acceleration, and long-term capital efficiency. So how do sophisticated investors actually assess whether a carveout paid off?

Start with the basics: revenue growth and margin expansion post-close. These are table stakes. But the more insightful metrics often lie beneath the surface. Does the new entity retain customers at the same rate as when it was inside the parent? Are procurement costs increasing due to lost scale benefits? Has employee attrition spiked since separation? These operational KPIs matter more than top-line optics.

Strategic fit is also essential—especially when carveouts are integrated into platforms.

Timeline to value creation is another lens worth highlighting. Unlike traditional buyouts, carveouts often require a longer ramp-up. According to EY, most PE firms expect a 24–36 month horizon before standalone profitability normalizes. Investors who price deals assuming Year 1 synergy delivery are usually the ones facing disappointing returns.

Let’s not forget capital discipline. Strong carveouts often show:

• Prudent reinvestment into digital and GTM capabilities.
• Asset-light restructuring to reduce fixed overheads.
• Controlled leverage deployment to preserve flexibility.

A final note: success isn’t always visible in IRR. Some carveouts deliver modest returns but serve as strategic springboards for broader platform expansion. Others generate headline multiples but degrade internal morale or stretch governance. Smart investors look at both the financials and the organizational trail left behind.

Carveouts aren’t just about offloading baggage or scoring a discount. They’re about spotting unloved assets, reshaping them with precision, and engineering value others don’t have the stomach or patience to pursue. As conglomerates continue to refocus and private equity seeks differentiated angles, carveouts will remain a sharp—and increasingly necessary—tool in the dealmaker’s kit. The winners will be those who embrace operational messiness, map integration like a chessboard, and stay disciplined long after the ink has dried.