Key Carve-Out Succes Factors
Carve-Out Chaos or Calm? The Secrets to Success
Our team has the privilege of having been able to support on carve-out projects for some of the largest multinationals around. We've learned firsthand about the complexities and challenges that can arise in such endeavours – and how to navigate them.
This blog post is a reflection of our experiences, and we hope that the insights will be helpful to you if you are embarking on similar projects.
What Is a Carve-Out?
“Carving-out” is the process of separating a business unit from a larger parent company. It is basically cutting the pie into two pieces with the purposes of divesting one of the two pieces. Carve-outs have become a strategic tool for multinational corporations seeking to unlock value, enhance operational focus, and adapt to changing market conditions. For example, by divesting non-strategic parts of the organization the rest of the organization (or “legacy business”) can focus better on its’ core strategy.
Of course, in such process – the desire is to lock-in as much value as possible, both for the divesting party as well as for the buyer. And of course, these are directly related to each other: the ‘better’ the carve-out, the more value is created for the next owner – and thus optimizing the proceeds for the divesting party as well.
But what makes a carve-out a “good” carve-out?
Note: the complexity of carve-outs is amplified for large multinationals with operations spanning diverse geographical regions, cultures, and regulatory environments. So, to ensure a successful outcome, careful planning, execution, and risk management are paramount.
We have summarized for you the most important success-factors and mistakes to avoid based on our experience when dealing with such projects.
5 Elements of a Successful Carve-Out for a Large Multinational
Getting the Perimeters Right:
Financial perimeter: What legal entities, financials, asset categories, liability categories, transactions etc. and generally speaking ‘operations’ are going to be part of the scope of the carve-out entity
Who goes where: Carve-outs both offer a fantastic opportunity for one colleague, whereas for the other such projects come with great uncertainty. As Management you should have a clear communication plan and think of a good way to ‘split’ the organization and its’ people (unless it is a 100% asset-deal, but which is uncommon because most often know-how is a key selling point to a potential buyer)
Regulatory considerations: Assess the regulatory landscape in each jurisdiction where the carved-out unit operates to identify potential challenges and compliance requirements.
Getting the Carve-Out Team Right:
Global expertise: Assemble a team with a diverse range of expertise, including finance (including M&A), tax, legal, human resources, operations, communications, and strategy professionals.
Cross-functional collaboration: Foster strong collaboration among team members to ensure effective coordination across different regions and functions.
Cultural sensitivity: Train team members to be culturally sensitive and aware of potential cross-cultural challenges.
Getting the Target Buyer Right:
Global market analysis: Identify potential buyers who have the financial resources, strategic fit, and operational capabilities to successfully manage the carved-out unit in a global context.
Strategic vs. Financial buyer: depending on whether you are selling to a strategic (e.g. another large multinational) versus a financial buyer (e.g. Private Equity) the carve-out target outcome will be different. Strategic buyers might integrate the carved-out business into their organization (securing synergies along with it) – whereas a financial buyer might only be interested in a fully functional organization including all functions.
Due diligence across borders: Conduct thorough due diligence on potential buyers, including financial analysis, legal review, and assessment of their global footprint.
Getting the Planning Right:
Develop a comprehensive global plan: Create a detailed plan that addresses the specific challenges and opportunities associated with a carve-out in a multinational setting.
Manage cross-border risks: Identify and mitigate potential risks, such as language barriers, cultural differences, time-differences, currency fluctuations, political instability etc.
Ensure consistent execution: Develop standardized processes and guidelines to ensure consistent execution across different regions.
Ensure Proper Stakeholder Management:
Stakeholder Mapping: Make a comprehensive list of all stakeholders, and per each of the stakeholder groups determine a proper strategy to keep these groups informed and involved up to a level necessary for that specific group. Some will require significantly more attention than others. Use the question “What would I find important in this project if I were in that persons’ shoes..”
Global communication: Communicate the carve-out plans to all relevant stakeholders, including employees, customers, suppliers, investors, and local communities, in a sensitive manner. And when the time is right.
Address global concerns: Address concerns and questions from stakeholders in different regions, taking into account local customs and expectations.
But if you have a carve-out at hand, it is not only important to get the above matters right. At the same time, you must also ensure to avoid the pitfalls that come with such a project – that might significantly jeopardize the value creation in a carve-out process.
The most important of such pitfalls, based on our own experience and understanding of such carve-out projects we have listed below:
5 Factors That Can Destroy Value in a Carve-Out for a Large Multinational
Ineffective (Global) Execution: Poor execution of the carve-out process, particularly in countries with different legal and cultural frameworks, can lead to delays, cost overruns, and damage to the parent company's reputation.
Business Disruptions: Like with many (M&A) projects, large carve-out projects take a significant time – and if not carefully managed might disrupt other ongoing activities, improvement projects, CAPEX cycles, sales and potentially any other operations in the business that require leadership- and management attention. Be careful not to neglect the ongoing business activities.
Regulatory Hurdles: Navigating the complex regulatory landscape in multiple countries can be challenging and time-consuming, potentially delaying the transaction or increasing its costs.
Employee Morale and Cultural Challenges: Poor employee morale and cultural integration issues can negatively impact the value of the carved-out unit, especially in a multinational environment. Because in the end – all businesses are people businesses, and the teams are one of the key driving forces of success. Make sure to not neglect the teams!
Improper Transactional Services Planning (post carve-out): When Transactional Services Agreements (TSAs) are not properly set-up or when the expectations from both sides are not properly aligned – this can lead to frustrated processes afterwards. The importance of such TSAs depends for a large part on whether you are dealing with a financial or strategic buyer.s
In Summary
By carefully considering these elements and avoiding these factors, large multinationals can increase their chances of achieving a successful and value-enhancing carve-out.
As indicated – this list is by no means comprehensive, but it should give you a good starting point.
To ensure a successful carve-out, consider partnering with a team of experts who can provide the guidance, expertise, and support you need. By working with experienced professionals, in conjunction with your internal team members, you can navigate the complexities of a global carve-out and maximize its value for your organization.
Remember, a successful carve-out is a collaborative effort that runs in parallel with the ‘ongoing’ business operations so careful planning is warranted to maximize value of the carve-out entity whilst protecting legacy business from Management neglect. Good luck!
