Harnessing the full potential of a carve-out acquisition

Carve-outs can create significant value for the acquirer, but at the same time, buying a part of a business also means that the integration comes with some tricky caveats that can put that value at risk. New analysis from Bain & Company details how buyers can harness the full potential of divested businesses.

Buying a divested business can be a strategic way for a company to reshape its portfolio and jump-start growth. Whether the objective is to expand into new markets, fill gaps in a product portfolio, or gain quick access to revenue, customers, operational capacity, and talent, carve-outs can create significant value for acquirers.

However, Bain & Company’s analysis shows that integrating carve-outs is easier said than done, with several challenges that can jeopardize success.

Cultural differences and process and technology issues are the biggest challenges in integrating carve-outs—followed by negotiating transition service agreements (TSAs), talent issues, and defining the carve-out perimeter. These issues must be proactively addressed from the outset.

According to the researchers, these factors have one common theme: they are all are issues that need to be addressed up front.

“Too many buyers fail to acknowledge a fundamental rule for success: Delivering full value from carve-outs requires more than simply getting to Day 1. Importantly, it also means using the carve-out integration as an opportunity to change the business and unlock its full potential,” said Jeff Haxer, a partner at Bain & Company.

“The most successful carve-out acquisitions start with due diligence that identifies both the carve-out-specific elements and the value creation plan required to underwrite the deal. They develop a solid integration thesis linked to essential value drivers and carve-out components.”

Recommendations

For buyers that are working on a carve-out purchase, the researchers put forward five recommendations:

Due diligence
Use cutting-edge diligence to assess the carve-out situation (e.g., perimeter, entanglements, standalone costs) and its impact on value creation. It’s essential to dig deep into people, systems, and assets – including contracts and intellectual property – and identify areas where TSAs or a build-out/integration plan are needed for Day 1. Diligence should also highlight commercial implications, such as distributor gaps or risk from comingled contracts.

Integrate and improve
Accelerate process and systems decisions. In a carve-out, critical interactions such as invoicing customers, paying employees, and ensuring product availability must continue seamlessly on Day 1. This requires early decisions on cross-functional processes and systems to be kept, cloned, built, integrated, or retired.

TSAs
Plan and utilize TSAs strategically. While TSAs are an important mechanism for continuity on Day 1, buyers and sellers have different motivations for a TSA’s scope and duration. Instead of operating on general rules of thumb like, “We need longer TSAs” or “We need to negotiate the best possible service,” buyers should look at TSAs as a bridge to achieve the integration priorities.

People & Culture
Set the tone on people and culture. Buyers often has limited visibility into the talent and the capabilities needed to operate. In addition, carve-out employees may feel undervalued, and sellers may be reluctant to let the buyer interact with them. Top acquirers work with the seller early to identify key talent, define talent movement metrics, and establish a compelling future vision. They activate leadership to ensure employees feel valued and aligned.

Day 1 planning
Plan for and execute Day 1 in a way that mitigates risk and prepares for the future state. While many acquirers see a smooth Day 1 as a win, the best carve-out acquirers prepare for cutovers at TSA exits with detailed plans to deliver synergies and future growth.