Optimizing Your Approach to the Corporate Carve-out
September 27, 2017
Corporate carve-outs are on the rise, as more organizations need to realign and refocus. But are they making the most of their opportunities? What can we learn from their approach? And what does that mean for your company and its plans for the future?
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Rarely has the world of business seen such dramatic upheaval as we are seeing today. Our reality is changing irrevocably, at an unprecedented speed and scale. The digital revolution is driving entirely new ways of adding value that were scarcely conceivable a decade ago. Groundbreaking technologies like artificial intelligence are poised to transform entire industries, from banking to retail. Meanwhile, consumers are taking note. Expectations are shifting and spilling over from one industry to the next, creating a strong incentive for companies to learn and adapt at greater speeds.
In a very practical sense, blue chip corporations face a higher risk of disruption than ever before. To remain relevant, major players in every industry must increase their flexibility and agility. They must not only focus relentlessly on their core business, but improve their capabilities. The game is not just about products anymore, it’s about responsiveness, entrepreneurship, know-how and mindset. It’s about understanding what consumers and investors want and delivering that value decisively.
To deal with this reality, traditional organizations are increasingly relying on a very specific tool: the carve-out process. Carve-outs allow corporations to refocus, redirecting their energy and financial means toward the core of what they stand for. By providing an opportunity to divest non-core aspects of the business, they are also useful tools against disruption; companies can use the proceeds to acquire startups and new technologies that will keep them at the forefront of innovation.
Simply put, the time of the great conglomerates is over. The market demands focus, and carve-outs are the ideal tool for the job. But carve-outs are a very particular breed of solution, one which many companies are ill-equipped to handle effectively. They deliver beautiful rewards, but only if their risks are managed properly. And to do that, you must first understand what those risks are and where they come from.
Corporate carve-outs are accelerating because businesses need to embrace new models and new capabilities. This makes the need for money and focus more acute. Carve-outs can provide both, but only when they are handled properly. And therein lies the rub: many companies lack the experience necessary to approach the carve-out process correctly. It’s not part of their muscle memory, because they’ve rarely given carve-outs the required attention in the past. This means they are often unaware of the risks involved in the carve-out process.
When the market speaks, it can use very inconvenient mouthpieces. In recent years, activist investors have left their marks on the business landscape in major ways. Vocal and tenacious, they can and will clamor loudly for divestiture if they believe it will generate better returns for themselves and other shareholders. This can put massive pressure on your company to break down the conglomerate, which in turn can lead to poor decisions. After all, if you haven’t been actively assessing your portfolio for opportunities to refocus, acting under pressure is unlikely to bring optimal results.
Historically speaking, carve-outs have an image problem. At first glance, nobody likes a break-up. An integration feels like a wedding, like welcoming a new member into the family. As a result, people enjoy working on them and are more willing to volunteer. They have every reason to feel good about what they do. Carve-outs, however, are often far from popular in most corporations. Nobody wants to be left behind, just like nobody wants to break up a company. This inherent negativity has lifted somewhat in recent years, but it is still a risk worth addressing. When nobody really wants to do the work, there is always room for optimization.
The risks of a corporate carve-out far outweigh those of post-merger integrations. While the latter resembles elective plastic surgery, the former is more like open heart surgery. In carve-outs, you work against the clock. There is little to no margin for error. Unlike integrations, where you might simply start building synergies after the deal is closed, carve-outs require strict precision. Failing to meet the deadline can have terrible consequences for your deal as well as your core business. You may lose credibility, sales, even clients, as well as opening yourself up to renegotiation and litigation.
Managing a carve-out is a very delicate process. There is a lot of sensitive information involved, and confidentiality is essential. Conventional wisdom dictates that you include as few people as possible, but thinking along traditional lines is not always productive. Just like open heart surgery requires more than just a surgeon to succeed, a corporate carve-out must bring all necessary expertise to the table at the earliest possible stage. The usual mix of M&A, legal and finance might be great at making deals, but they often lack the operational insight to guarantee that the carve-out is actually feasible.
Research carried out by Accenture Strategy revealed that only one out of every two companies has best practices they can apply to business carve-outs. Worryingly, even those companies that do have established best practices do not have standard methodologies or toolsets in place. And while there can be no universal path to success, the research identified six key steps to improving results:
These guidelines accurately capture the requirements for success, but there is still another ingredient to consider: operations. Decisions made in the scoping process can and will have a significant impact on the operational aspects of your carve-out. If operational expertise is lacking at this stage, the results can be disastrous.
In one case, a European leader in energy management embarked on a carve-out which was mainly driven by its legal and financial teams. There was no operational involvement whatsoever, which led to serious scoping and feasibility issues, along with almost three years of delays. Needless to say, the direct costs and lost opportunities were substantial for both buyer and seller.
Situations like these are unnecessary and can be prevented in various ways. One approach is to involve the COO from the outset of the carve-out and invite a small operational delegation to join the legal, finance and M&A teams under the cover of a solid NDA. Another approach which is becoming more popular is to integrate operational insight and experience directly into the core M&A team.
In either case, the objective remains the same: to confront the operational implications of your carve-out early on and ensure that the entire process has the highest possible chance of success. After all, a carve-out is not just about closing the deal. It touches every aspect of your business, and involving operations will help ensure that things run smoothly.
Global business is changing. Accelerating technology, shifting consumer expectations and increased disruption are the driving forces of this new era. In this environment, the success of your company depends on your ability to focus.
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In this dynamic environment in which products have become a commodity, which business models are still effective for banks and insurance companies? We shed light on predictable disruption.
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Without focus, you run the risk of spreading yourself too thin to act and respond effectively. You run the risk of not being able to identify valuable opportunities or invest in them. You run the risk of losing your strategic self-determination to activist investors. And perhaps most significantly, you run the risk of irrelevance.
Corporate carve-outs are not a panacea for these risks, but they are valuable tools to improve your focus, flexibility and agility. Wielding those tools effectively requires keen operational insight. Of course, integrating operational know-how is not a silver bullet. Odds are, you’ll need advisors. People who have extensive experience guiding and running these kinds of extremely complex projects, who can help you find your way. Still, it’s important to understand that operations will play a pivotal role in the process.
There is a lot of money to be made in a well-managed carve out, and considerable efficiency to be gained. Achieving those outcomes means remembering one thing: that great carve-outs go beyond legal, M&A and finance. Having the right specialists at the table is the sine qua non of success.