Corporate carve outs: getting it right from the start
24 Nov 2021
Breaking up is hard to do, which is why at our recent corporate M&A community networking event, we asked a panel of experts to share their tips for successful uncoupling.
It’s been a record two years for corporate carve outs, as companies shed non-core assets, to re-position portfolios, shore up balance sheets, and focus on what’s really core. Here's the issues in corporate carve outs you need to understand.
Be clear about why you’re selling
“It’s very unusual to wake up one morning and think ‘this business isn’t relevant’, but there are certain events that require strategic shifts.”
Alexandra Calinikos, Corporate Development & Strategy Director, Financial Times
Even before COVID-19, companies were increasingly looking to reposition their portfolios to focus on core operations. Our panel agreed that, for the most part, coronavirus accelerated this. It was even the key driver of some carve outs where long term changes in customer behaviour downgraded certain divisions from core to non-core.
This is an (albeit exceptional example), of how external events can alter the relevance of a division/business unit/brand within a parent, and is a reminder for companies to regularly assess their portfolios.
Don’t underestimate the challenges
“It’s easier to sell off a huge business in its own right than a £6 million side asset.”
John Faulkner, Group Strategy & Corporate Development Director, Amey
Early, up-front preparation, was a key theme of the evening for both sellers and buyers:
As one panel member put it, “the numbers of a carved-out business often don’t bear any resemblance to those usually reported by the parent”. Sellers need to allow enough time (before bidder due diligence) to develop robust carve out financials, reflecting well considered adjustments for operating outside of the parent, and hinging back to statutory and management accounts where possible. It’s essential that the divesting company's management own and stand behind the numbers. On the buy-side, bidders require an experienced investment committee that can both deal with risk, and capitalise on unexpected opportunities.
It was unanimous among the panel and guests that untangling spaghetti-like IT systems and infrastructure from a parent company can be one of the most costly and time-consuming areas of a carve out, and if digital products and platforms need to be separated then this compounds complexity and cost. Tech SMEs need be involved early; to consider impacts across the whole business model.
The scope of carve out issues varies for each transaction, but other issues discussed included managing the seller’s stranded costs: ie what get’s left behind post-separation, and ensuring alignment between parent and target management, so everyone's singing off the same hymn sheet.
People are key to a successful carve out
“Employees from non-core divisions feel a bit unloved – like they’ve been in the spare room for the last two years – they just can’t wait to get out and be given a new lease of life.”
Peter Wood, Principal, Aurelius
Most companies will say that people are the most important part of their business, but they're also the most overlooked when it comes to transactions. Our panel debated the pros and cons, and timing, of bringing the target management team to the deal table.
Some processes do this from the start, others wait until there is deal certainty; often to manage market confidentiality risk. Early involvement helps to ensure alignment between the parent and entity being sold, removes some uncertainty, and prepares the soon to be departing management team to engage with bidders. Striking the right balance involves evaluating the personalities involved and bringing them authentically to the table at the right time.
Put ESG front and centre
“Any divestments we make connect back to our purpose. It’s about taking that brave look at yourself and asking if you are the right owners of that business and are doing the fair thing by holding onto it?”
Kirstie Donnelly MBE, group CEO at City & Guilds Group
Strong Environmental, Social and Governance (ESG) credentials are no longer a nice to have; they are integral to both customer, investor, and debt-provider decision making. Companies are increasingly assessing their portfolios against these three metrics and divesting divisions that don’t align with their values. As our panel pointed out, a divestment itself can contribute to the ‘S’ of ESG by enabling an unloved division and its employees to prosper under new ownership.
The above tips just scratch the surface of the complexities of a carve-out deal. If you would like to continue the conversation with your peers and participate in future networking events, please join our Corporate M&A Community LinkedIn group or contact Matthew Woodgate.