Over the past few years, divestitures have accounted for a rapidly increasing percentage of total M&A activity. Organizations generally complete more acquisitions than divestitures, in particular during times of outlook. makes it a perfect time to look for good deals in this space. However, firms looking at buying divested businesses will face the challenges of how to integrate certain divested assets from separate entities into a corporate whole. integrating carve-outs…one of the most challenging, but exciting, M&A scenarios.
But…what is a carve-out?
The generally accepted definition for the term “carve-out” is the operational and organizational activities necessary to complete the transfer of a business during a divestiture transaction. Although both buyer and seller have joint responsibilities during the carve-out process, the majority of the burden generally is on the shoulders of the buyer. This is intuitive, as they need to manage a host of differing, and highly complicated, issues in order to maintain and maximize the deal value during the carve-out process. If they mess up the integration, the seller may no longer pick up the phone.
Why are carve-outs so complex?
If a firm wants to attain both the desired operating efficiencies and business functionality, the company will need to operate based on highly integrated processes and systems, largely relying on estimated data, to support their entire corporation throughout the integration. Corporates are like an ecosystem, each feeding on each other. When a part of this ecosystem is removed (divested) from its corporate parent, its highly integrated processes, systems, applications and data must be disintegrated. Due to the issues that entail, this generally extends the support relationship between a seller and buyer than what we see in other M&A transactions. If this is longer than the parties originally agree, it will generally result
Below we list a variety of factors that normally make carve-outs more complex and risky than expected. Don’t get blindsided by these:
Six steps for help ensure success
Below we provide 6 steps we think will help guide you through the carve-out process.
Like with all deals, the first thing you need to do during the carve-out process is to determine and define exactly what’s included in the deal, the “four corners”. Communication, or lack thereof, can result in a lot of M&A deals falling over, and this is important here too. Make sure you clarify what is and what is not included in the deal. Where possible, try and determine the operating model necessary to run the business involved in the carve-out. Due diligence is key, and use this time to find possible hidden costs and hidden contracts.
A Transitional Service Agreement is made between a buyer and seller and contemplates having the seller provide infrastructure support such as accounting, IT, and HR after the transaction closes. Instead of relying solely on the seller to lead the TSA process, the buyer should complete their own independent needs analysis; which includes costing analysis and benchmarking. Timelessness is key, and make sure you build in reasonable deadlines that allow you as the buyer to build, test, migrate and operate new systems independently at TSA exit.
At the end of the day, the approach you take to the integration should be determined by the type of acquisition you’ve made, no two deals are alike.
You need to define a comprehensive concept of operations. This is a fundamental part of the carve-out integration strategy and allows you to take control of what you will or will not be taking over / buying. To define the operations, begin with the overall strategic context for the purchase; the specific target company or business unit and your deal logic.
For each integration decision to be determined, work out timelines, short vs. long so you can start to piece together how long the integration will take in its entirety. Secondly classify each according to the overall approach to integration that will help you most effectively preserve, capture and maximize deal value.
It’s important to gain sufficient insight into the leadership on both the buyer’s and seller’s side:
The buyer’s leadership will be responsible for setting the vision, communicating the strategy, and inspiring staff who may feel rejected or betrayed.
Regarding the seller and the leadership to be divested, consider the historical and current relationship between the seller’s parent entity/leadership team and the to-be-divested entity/leadership team.
Though a carve-out affords a unique set of challenges and considerations, it has a lot in common with other M&A deals, in particular, other types of integrations. Don’t neglect best practices from these other, arguably less complex, transactions. For example, you should still enforce a strict integration framework, and you must prioritize your initiatives and objectives from day one. Carve-outs require cautious change management and culture alignment by mitigating potential flashpoints and resetting expectations for high performance.