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Strategically divesting while integrating can help keep your company’s growth on track.
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Read moreAs organizations expand their portfolios through acquisitions, effective portfolio management may require them to simultaneously divest select assets to focus on core competencies or to comply with regulatory requirements. In fact, according to an EY-Parthenon analysis, approximately two-thirds of the 100 largest US acquisitions that closed between 2014 and 2024 were followed by a divestiture within 17 months on average.¹
What typically happens is sequential buying and selling, which involves acquiring and integrating assets over a year or more before carving out a subset of the purchased entity. Alternatively, noncore assets may be kept stand-alone, driving incremental operating and oversight costs while their “secondary” status may depress the commercial performance and brand perception ahead of the divestiture.
Rather than delaying off-loading an asset and curtailing the ParentCo’s² growth trajectory, buyers should consider concurrent integration and divestment to accelerate the transformative potential of the deal. This approach should be formulated during due diligence or early in integration planning to provide sufficient lead time for effective execution.
The sign-to-close phase of an acquisition often involves a waiting period due to factors such as regulatory reviews and approvals, legal requirements, board sign-off and stakeholder alignment among others. This period can be used by the buyer to plan the divestment process of noncore assets so that once the deal closes, the separation can proceed without delay. Prior to separation planning, a divestiture viability assessment of the identified business should be performed to determine whether to proceed.
There are several common strategic and long-lead preparatory actions to prepare the carve-out that can be initiated, including:
Assessing entanglement and defining the separation strategy: Identify key dependency areas for the carve-out based on the lead time and level of effort required to stand up and develop a high-level separation roadmap.
Conducting scenario planning: Perform a financial analysis of multiple carve-out valuation scenarios.
Refining the value story: Prepare an asset for sale by honing the value story. This can accelerate the time to diligence with a potential buyer by one to three months depending on the starting point and level of complexity. This is a prerequisite to finding suitable buyers. Companies may need to combine the TargetCo and its own assets to create a more attractive carve-out.
Scanning for suitable buyers: Engage bankers and external advisors, scan the market and initiate outreach that validates the buyer’s interest.
Preparing to stand up legal entities: Chart out the legal entity stand-up timing requirements. New entity registration and operationalization timelines can vary from four to nine months and the legal steps (such as incorporation and tax identification) and preparatory operational efforts (such as selection of vendors for treasury, human resources and IT) can commence before the close. They carry marginal costs and can shorten the separation close timeline by up to four months.
Drafting current and day one operating models: Document how the company to be divested operates and collate the necessary diligence artifacts. This can take months and it is critical to proceed with diligence for a potential buyer.
Developing an IT strategy: Create an IT plan early to reduce the length of, or eliminate, long-term TSAs.
Commencing financial carve-out and staging audit: Assess buyer scenarios that may warrant audited carve-out financials. When scenarios are identified, initiate the preparation of carve-out financials and the related audit to reduce the risk of delaying the transaction’s close.
Divesting while integrating presents a unique set of challenges that can test even the most seasoned business leaders and risk-tolerant corporate cultures.
Harmonizing separation and integration plans: Since both processes must be managed in tandem to prevent operational disruptions, a governance body that has insight into both sides becomes important. This can help avoid pitfalls that may occur if the two transactions happen separately, such as:
Leveraging an agency model workaround: One of the best available deal execution accelerators may not work well with concurrent integration because the carve-out would have to either be integrated (an unnecessary effort) or maintained in a separate legacy environment (usually costly and impractical).
Works council requirements: Integrations and divestments often require navigating intricate labor laws and engaging with works councils that play a significant role in employee relations in relevant jurisdictions. Managing these specific requirements for both transactions in tandem creates additional complexity and can stir confusion among teams.
Maintaining confidentiality: One of the foremost challenges is maintaining confidentiality throughout the process. Information leaks can have legal or regulatory ramifications, detrimental effects on employee morale, strained customer trust and a diminished competitive advantage. To mitigate this risk, protective mechanisms such as standing up a data clean room, monitoring access controls and clearly defining stakeholders to bring under the tent should be employed.
Gun-jumping: Premature management of the entities in a proposed acquisition is a common issue but openly trying to sell off a piece of a company that you do not own raises gun-jumping concerns to new heights. Companies must navigate this by carefully framing data requests and interviews.
Culture stewardship: In a typical carve-out, employees move to the carve-out from the ParentCo; however, in a carve-out from an acquisition, a conflict of cultures may arise. This requires a specific strategy to manage alignment and subsequent buyer communications. This scenario is also more prone to gun-jumping because the carve-out’s interests become more tied to those of the buyer.
A diversified health services company acquired a healthcare business, anchoring its core asset to the home health platform while simultaneously separating the remaining operations into a private equity–backed stand-alone company. The ParentCo accelerated the process through disciplined scenario planning, strong governance and culture stewardship.
Scenario planning: Delineating how to structure the integrated ParentCo’s vs. the DivestCo’s profits and losses for the purposes of the sale required trade-offs, which were heightened by the ongoing integration efforts. Perimeter decisions influenced the valuation and baseline EBITDA for both the ParentCo and DivestCo. Additionally, due to the level of synergies expected from the integration of the home healthcare asset, a careful balance was necessary to enable both the DivestCo’s operational continuity and achievable synergy targets for the ParentCo.
Strong governance: Creating a centralized executive steering committee minimized the confusion by streamlining coordination across the separation and integration deal teams. Any decision made for DivestCo influenced the decisions made for the integration and synergy opportunities for the ParentCo.
Culture stewardship: Given the already high attrition rates in healthcare, introducing friction by breaking up existing service lines while integrating the new asset jeopardized business continuity. This required disciplined scenario planning, coordination and proactive communication. Coordinating divestiture steps with the integration priorities helped preserve and ultimately increase the deal value. At the same time, the ParentCo mitigated the employee turnover risk during a time of uncertainty.
Sebastian Boetticher and Deanika Preuss of Ernst & Young LLP contributed to this article.
Divesting while integrating is akin to renewing the parts of a machine even as it continues to run. While there are certain challenges in undergoing this type of effort, if these roadblocks are appropriately identified and teams are properly equipped for the journey ahead, the ensuing obstacles can effectively be surmounted.
