Carve-outs & Divestitures

Companies undertake carve-outs — or a strategic separation of a specific business unit — for a variety of reasons, which often include: increasing focus on core competencies, improving financial performance or achieving regulatory compliance. Based on L.E.K. Consulting’s experience, planning a successful project typically has three primary objectives:
 

	Clear definition of the deal perimeter; what assets that will convey (NewCo) and what is to remain with the parent company (RemainCo)
	Maximize value creation for both the seller and the buyer
	Minimize internal disruption caused by the separation process

L.E.K.’s perspectives on a target operating model and critical carve-out components

Successful outcomes depend on the seller and the buyer navigating through key components.  

Four factors for buyers to consider

1. NewCo strategy and future state operating model. Develop a clear sense of what the target operating model looks like as described in the following areas:

• Portfolio and services – Understand product and service offering entanglements with the seller and how conveying portfolio/services will operate (i.e. as a standalone entity or integrated) going forward
• People and organization - Identify conveying employees and retention strategy for keeping key personnel through the transaction  
• Physical infrastructure – Determine target state for conveying physical assets (e.g., office space, manufacturing facilities, warehousing)
• IT systems – Determine enterprise architecture and systems for NewCo; agree on data ownership and/or transfer requirements to sustain key operational processes (including relevant historical data)
• Business processes – Map core processes and what may need to change due to the separation (for either NewCo or RemainCo); in particular, understand where transfers of intellectual property (IP) and relevant technical knowledge will impact core processes
• Third-party support – Assess potential gaps and comingling of third-party support – including key suppliers

2. Transition Service Agreements (TSAs): Evaluate service requirements for NewCo and develop transition service agreements (TSAs) to ensure sufficient support to stand-up the company with no disruption to RemainCo’s business. Create processes and procedures to monitor support from the seller to help transition smoothly while ensuring timely exits of TSAs through stage-gates.  
3. Separation Management Office (SMO): Appoint a central liaison to oversee the planning and execution process, coordinate with the seller, and codify guides and playbooks for any future carve-outs.
4. Communications and change management: Develop a communications plan for all internal and external stakeholders. Create consistent messaging aligned with the overall strategy and vision of the company and drive delivery with confidence.

Five factors for sellers to consider

1. RemainCo strategy and future state operating model. Develop a clear view of the target operating model for RemainCo and a clear understanding of assets being separated by defining parameters across the following:

• Portfolio and services – Identify products and services that will not convey and have entanglements with NewCo.
• People and organization – Plan for conveying employees, employees supporting TSAs and retained employees in RemainCo  
• Physical infrastructure – Assess separation strategy and timelines for divesting physical assets that are conveying as part of the transaction
• IT systems – Develop the plan for extracting key systems and underlying data that will convey, evaluate Intellectual Property (IP) concerns, and create an extraction plan
• Business processes – Codify business processes that support key operations to ease the transition to the new owner
• Third-party support – Engage key suppliers and third parties to ensure continuation of key services for both NewCo and RemainCo

2. Transition Service Agreements (TSAs). Evaluate support required for NewCo to develop Transition Service Agreements (TSAs) and ensure no disruption to business. Create processes and procedures to provide the right level of support to the buyer to help transition smoothly while ensuring timely exits of TSAs  
3. Separation Management Office (SMO). Set up a Separation Management Office, which acts as the central liaison to oversee planning and execution, ensure coordination with the buyer, and codify guides / playbooks for any future carve-outs.
4. Communications and change management. Develop consistent messaging for all stakeholders.
5. Transaction/sale preparation. Develop transaction documentation, e.g., purchase and sale agreement, bill of sale, tax documentation, and legal documents in preparation for closing.

A fit-for-purpose approach

Our experts help clients throughout the carve-out journey, from the early stages of gauging the level of entanglement to the development of transition service agreements (TSAs), creating detailed separation plans and, finally, helping with effective execution. We have experience across the full spectrum of separation scenarios, including buy-side, and sell-side, establishment of the NewCo as standalone asset or integration with the buyer.

Carve-out successes stories

• A private equity firm was looking to separate a portion of its portfolio company, a leading manufacturer of specialty chemicals for agriculture and pharmaceutical end markets. L.E.K. performed an in-depth assessment of the management’s carve-out plan by evaluating requirements for the standalone NewCo’s organization, systems, processes, infrastructure, and plans for third-party support. We determined one-time and ongoing costs for the project across various scenarios. The client was ultimately able to gain a robust view of its target state, costs and transition plan, and confidently negotiated with buyers to arrive at the right value.  
• A private equity firm was looking to invest in the generics pharmaceutical industry and asked for L.E.K.’s help with designing the future state operating model for the target entity, which was going to be seperated from a larger pharmaceutical company. We performed a comprehensive assessment of requirements to stand up NewCo and designed the target operating model. The client had a clear understanding of key gaps in capabilities and resources for NewCo and investments required to stand up the carved-out entity. To paint a robust financial picture for the buyer, we performed industry benchmarking for key functions to estimate NewCo’s costs and compared them to the seller’s forecast to reconcile any differences and assess accuracy of management projections. The client received a synthesized view of costs of NewCo, identified critical areas of support needed from the seller, and developed Day 1 transition plans to ensure a smooth seperation process.
• A fintech payments company was in the process of acquiring and combining with three other related companies, which would dramatically impact the business’s size, offering, and customer reach​. One of the three acquired companies was carved out from a major financial services technology company. L.E.K. helped to manage and exit the TSA while driving the broader integration effort. We developed a target organization structure, identified resources needed to stand up the carved-out entity, and embedded TSA exit timelines directly into functional integration plans to ensure an on-time exit and prevent cost overruns.