A Carve Out or Divestment or sale of a division or business unit—is a complicated transaction, and thus have to clear a higher hurdle for success than typical mergers and acquisitions.
Yet, they are worth the extra effort, offering a lot of attractive benefits for both buyers and sellers. For buyers, they can lead to lower premiums and higher gains, and ultimately greater returns on investment. For sellers, carve outs or divestments can have a higher likelihood of closing the deal, and they allow them to focus on the rest their business by eliminating parts that are less of a strategic fit (see figure 1).
Carve-outs or divestments can be very complex, however, and capturing their advantages requires looking beyond the financials to understand the challenges associated with the transition. This paper looks at how buyers and sellers can better manage carve-out transactions to ensure that they succeed.
More Upside Means More Complexity
No two deals are the same, and every M&A transaction has unique challenges. However, carve outs or divestments present more complexity for buyers and sellers. First, the units in play invariably rely on the parent company for critical business functions that are not part of the sale (for example, information technology, human resources, and supply chains). As such, the buyer in a carve-out typically requires post-deal support from the seller (or vice versa) for a finite period of time under a transition services agreement (TSA). TSAs provide the legal, contractual framework for business continuity until the buyer can integrate the acquisition into its own operations.
Often, the rush to get a deal done overshadows the need to develop a game plan to separate and transition the people, assets, services, and contracts. Without such a plan, both buyers and sellers risk disappointment, unforeseen costs, business disruptions, integration delays, and lost customers, not to mention the additional time taken by senior executives and others to resolve issues that easily could have been addressed earlier on.
The good news is that such unintended consequences can be avoided by managing the transaction and the transition. This means agreeing to guiding principles, clearly defining the destination, and having the right resources at the negotiation table.
Agree on Guiding Principles
When buyers and sellers enter into transition negotiations, each side has different motives (see figure 2). For buyers, business continuity is a top priority, to ensure that critical functions remain in place until separation occurs. Buyers typically want broad service requirements and rigorous key performance indicators (KPIs)—and shrewd negotiators will also try to extract as many free-of-cost services as possible. For sellers, being able to exit the transition period as quickly as possible is of paramount importance. In most cases, the seller is not in the business of providing outsourced services, so will want to refocus quickly on restructuring its remaining core businesses. Further complicating matters, the true costs of providing shared services are often unknown, leading the seller to aim for higher fees and profit margins during negotiations.
Establishing the following guiding principles in the TSA will help prevent problems arising from these different motives:
Define the nature of services and fees. What is written in the TSA will define what is adhered to during the transition. Thus, the nature of the services (such as order entry and cash receipt) and the associated fees must be explicitly defined. Too often services are defined at the functional level (for example, in finance), which can quickly lead to confusion once the deal closes. Leading companies review each process across functional areas (for example, order-to-cash) to define the key steps and clarify the activities that are supported by the seller and which will require transition support.
Establish the base for cost calculations. Because sellers are not typically in the business of providing the services included in the TSA to third parties, transactional costs are often unknown. Cost allocations charged back to a division can often provide a basis for estimates; however, the best base for calculating fees, including fixed and variable cost elements, is from actual cost drivers such as head count, office space, and server utilization.
Set reasonable timelines. The duration for a given schedule will vary on a case-by-case basis. Sellers and even buyers can be overly optimistic about how quickly and easily separation will occur. Set realistic, rather than aspirational, time frames not only to ensure business continuity, but also to ensure the buyer does not risk its integration and the seller can make appropriate plans for post-sale restructuring. The potential for extensions should be explicitly contemplated and negotiated, including penalty fees if the transition services are not exited as planned. This approach provides appropriate incentives for both buyers and sellers to abide by the agreement, while allowing some flexibility for uncertainties.
Use realistic performance standards. Another common mistake during negotiations is to demand (or promise) higher levels of service than have existed historically. Both parties must remember that in most cases, historic service levels are sufficient to sustain the business, and they typically represent a fair balance between costs and true business needs. In situations where past KPIs are not available, the buyer should benchmark services and interview current employees to gauge the appropriate standards.
Define the Destination
A well-crafted TSA is a roadmap that guides both parties from the close of a deal to the separation of operations. However, for any roadmap to be effective, it needs to know the destination. Before the parties can draft a transition plan, several key areas must be addressed and questions answered:
Employees. Which employees are vital to running the businesses long term? Are there critical employees who should be specifically called out in the agreement? Which gaps need to be filled and how long will this take?
Assets. Which assets truly belong with the acquired business, and which should remain with the seller? Where are the gaps?
Services. Which services will the seller have to provide through the transition? Will the buyer have to provide services to the seller? Which employees or assets will support these services?
Financials. Are the business unit’s financial statements a true representation of how it would perform as a standalone?
Contracts. Which external vendor relationships are utilized by the business that is being carved out? Will the seller continue to require the vendors’ services going forward? What actions and communications are needed to ensure ongoing supply of the needed goods and services to the buyer and seller?
Answering these questions requires an understanding of business practices at deeper levels than what takes place in a typical due diligence process. While tight timelines and pressure make it easy to overlook the details, getting to the end-state requires knowing everything about everything.
Have the Right Resources at the Table
Managing the transition requires both strategic and tactical know-how. Strategic issues have to be addressed—including which services to manage internally, which to outsource, and what is the need for longer-term buyer-seller relationships. Tactical elements must also be worked out to ensure that negotiation of the TSA does not delay the deal. Who is going to gather the requirements and draft the agreement? Are the terms sufficient to avoid business disruptions? Figure 3 offers a to-do list for buyers and sellers.
Getting strategies and tactics to the negotiating table will require additional resources, beginning with the deal team and project management office. It will take effort to balance the interests of the parties and to oversee and coordinate the many cross-functional interactions that might otherwise push the deal into negotiation limbo. Here, an external party with specific industry expertise can help keep the process on track and facilitate a faster close.
Because of non-disclosure and confidentiality requirements, functional managers responsible for providing and receiving relevant services should have defined roles for creating the TSA.
As subject matter experts, they are best positioned to align service schedules and objectives. Incorporating their input will also help avoid unwanted surprises during the transition.
Finally, HR and finance staff play a key role. Addressing employee matters is always important; however, during a transition additional issues may arise when a workforce is separated administratively but still performs its former function. Imagine the potential confusion: Who is the true employer of record? Who provides direction? Who is liable for grievances and claims? These and other questions should be addressed by HR teams before the transition. Meanwhile, finance teams need to work through the fee structure as well as invoicing and payment mechanisms to make sure both parties have a clear understanding of how transition services will be administered.
Carve Outs or Divestments Still Make the Cut
Carve outs or dicestments will remain an important part of the M&A landscape as companies continue to seek ways to deploy their resources more effectively. Those that not only find the opportunities but also manage the complexities will be well positioned to outperform their competitors.
Bron: Dit artikel is geschreven door Jeffrey Ward en Andrés Mendoza Peña van ATKearny VS. Bekijk het originele artikel hier.
Benieuwd naar de meestgemaakte carve out fouten die wij tegenkomen in onze praktijk? We maken graag tijd om met u uw carve out te bespreken. Of hoe wij een carve out of divesture aanpakken. Bekijk de carve out suggesties van Harold de Bruijn. Bel met hem of met Evert Oosterhuis op 036-202 2361. We zijn u graag van dienst.