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Capturing value through carve-outs - Four steps for buyers - EY - Global

Capturing value through carve-outs

Four steps for buyers

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At the start of transition planning, focus attention on those business processes most critical to success.

When the transaction closes, the seller's work is fundamentally complete, however, the buyer's journey is just beginning. Below are steps that buyers should keep top of mind through this process:

Four steps for buyers

  1. Come to terms with the components of the asset
  2. Assess up-front and ongoing costs
  3. Make readiness a priority
  4. With TSAs, focus on the details

1. Come to terms with the components of the asset


It may seem obvious, but buyers need to know exactly what their organizations are getting: exactly which assets, which legal entities, which accounts, which people who directly support the assets, which people who partially support the assets and so on.

But in practice, many prospective buyers experience misunderstandings right up until closing – or, worse yet, find serious discrepancies after the close.

It is imperative for the buyer to get an accurate understanding of the boundaries of the target or "what's in and what's out" early in the transaction in order to be able to start identifying synergy opportunities, tax implications and post-close operating options.

A comprehensive assessment of the operational considerations of the transaction through operational and integration due diligence is critical for accurate pricing and achieving the deal value drivers.

2. Assess up-front and ongoing costs


A buyer must concentrate on evaluating the accuracy and completeness of the seller's cost assessment. While the obvious areas include IT, real estate/facilities, HR and tax – any of which can be the source of significant surprises – it is important to examine less obvious areas such as insurance and environmental health and safety costs and customer contracts and tenders.

Other potentially complex cost considerations include replacement of corporate shared services, acquisition of software licenses, renegotiation of leased facilities, severance, "hidden" HR costs and often overlooked tax issues.

Buyers should obtain a detailed inventory of the services provided to and required by the carved-out entity in order to form an independent view of their true economic value. Often, the carved-out business will lose access to important corporate services from groups such as treasury, sales, audit, finance, HR, tax and IT that must now be replicated.

3. Make readiness a priority


All buyers need to prevent loss of value, and get the new assets productive as quickly as possible. If the business is standing alone, this means getting the operations (people, systems, processes) stabilized after the upheaval of the change in ownership.

If the asset is being combined with another entity, it means getting the Project Management Office (PMO) running efficiently with a clearly articulated sense of purpose, governance and change management policies.

Even experienced acquirers of carve-out assets underestimate the work required for timely capture of transaction value drivers. Meanwhile, the market is watching and ready to critique transition performance.

4. With TSAs, focus on the details


TSAs are essential to the effective integration of carve-out assets. Too often, having disposed of its carve-out assets, the seller may lose the ability to provide services at the expected level due to changes in staff or structure.

This can lead to deterioration in the quality and timing of operations, which can seriously disrupt a newly launched business.

Detailed TSAs should address who will be accountable for delivery of the TSA contracted service, what is the issue escalation process and a number of other very tactical considerations for example, whether VAT incurred by the seller or buyer is recoverable and if not, who is responsible for the cost.

These must be defined, in detail, prior to close. Leaving matters such as TSA performance reporting, pricing, penalties and the like to the last minute can have significant post-close consequences.


 Find value in synergies


 Capitalize on the hidden value of human capital

Find value in synergies

Often, a key value driver in a transaction, particularly for a strategic buyer, is the potential revenue or cost synergies. While synergies often look good on paper, without a delineated plan for implementation and allocation of responsibility, there is a danger that they materialize slower than envisioned or ultimately deliver less value.

The due diligence process should address synergies and plans to drive and track the benefits into the business post-close. Detailed planning in this area is not always given the level of focus it deserves.


Capitalize on the hidden value of human capital

It goes without saying that a highly motivated workforce is a significant competitive advantage. And since conditions leading to a carve-out rarely materialize overnight, the managers and staff associated with the business have often been living under a shadow.

Possibly fearing for their future, such workers have a tendency to lose their focus. Leading strategic and financial buyers often view their ability to inspire and re-energize workers during the transition from carve-out to stand­alone or integrated workforce as an essential core competence.


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