Carve-out: A Proven Path to Execution

Various reasons, from cash generation to meeting anti-trust requirements, can lead to a carve-scenario. Only: A carve-out does not just happen – it needs to be planned meticulously.

Once the strategic decision for a carve-out has been taken, planning commences: Target buyers need to be identified; competing priorities like execution speed, value and quality need to be balanced. From a purely operational point of view, however, there are a couple of steps which will lead the program manager through the schedule, depicted in the illustration below:

Initially, the boundaries of the business that shall be carved out need to be set: Locations, functions, products and services, and/or people are key determinants. In a next step, the carve-out leadership team has to be nominated. At times, not all functional management positions required for the new business can be filled from within. Given the time constraints of such a project, interim management can be a resourcing option if immediate external recruitment is not feasible. Just like in any other strategic project, the carve-out team needs to take shape, and the project should be structured into an execution team (functional management plus support team) and a steering group. Timing and objective of the carve-out should be set, as should the project governance (decision making processes, conflict & priority management, resourcing….).

People are the heart of any business, and people concerns need addressing early on. HR plays an important role throughout the project execution cycle, and should be staffed adequately. Change management know-how helps, together with a good communication plan for internal and external addressees (communication, however, is certainly not solely a HR task).

In the next step, the new business‘ operational readiness becomes the focal point: Functional processes should be reviewed and listed, including any interfaces with adjacent functions and hand-over points. Transitional/Temporary service agreements (TSA) should be prepared for those functions and processes which will not carry over into the new entity. Any capability gaps (functionally and resource-wise) need to be identified and addressed, either through TSAs, external services, or internal capability build. Furthermore, the new company need to be registered (court of commerce, tax, any other regulatory bodies).

IT and Business Systems represent a relatively large risk: Systems may be sustained, separated, relieved, and data potentially transferred, adapted, changed, deleted. Data and systems are key components in a spin-readiness assessment.

Eventually, Day 1 is going to be there. I have yet to see a spin that would take place without any issues: There is always something that was forgotten, that goes wrong or at least not as planned. The carve-out team should be set up for some post-spin issues management. Some issues only surface with delay, during a closing cycle, for example. Continuous monitoring of systems and detection of unusual process behavior are crucial in this stage.

While the above describes some common steps and activities, all carve-outs are different: Differently sized, different complexity, different people. There is no one-size-fits-all approach, and there is no predetermined timeline either. I recommend developing the detailed program in a reconnaissance phase together with Management. As a side effect, this also triggers early Management involvement. Getting Management buy-in to the approach, a commitment to objectives and eventually the timeline is crucial for a high caliber project like a carve-out in any case.

Carve-outs are predominantly transformation and change programs. My recommendation would be to look for a project manager with relevant transformation experience, rather than look for an industry insider lacking the project and process management know-how.

M&A Pitfalls: Cultural differences are minimal!

Getting a grasp on corporate culture is difficult, but ignoring culture can destroy value.

A common mistake in post-merger integration is the underestimation of cultural differences between the acquirer and the acquiree. If employees cannot identify with the new organization, and a „It doesn‘t work like this here!“-mentality is spreading, the risks of customer neglect and ultimately business failure are increasing.

Triggers may be the abolishment of dear symbols and brands, or the change of policy, rituals or processes without proper communication. And we all know: People get really mad if you take their perks away.

Prevention strategies include:

Identify important cultural building blocks.
Describe the future state and develop a transition path.
Leadership communication of vision and purpose is mandatory.
Walk the talk !
Read early signals. Pull in lower and middle management.
Be patient! Cultural change does not come overnight.

Inside Post-merger Integration – A Practitioner’s Guide to a Successful PMI Project

I have published my experience from numerous PMI projects in a small booklet, available to any interested party as a free download. It should help anyone involved in a PMI project to identify some core elements in project organization and operation. Let me know what you think.

M&A Pitfalls: Full Integration

Managing a post-merger integration is a mammoth task. Integrating everything is not a requirement.

Objectives should be challenging – no doubt. The objective to integrate an acquired business in full may be a little too much, though: Full integration is rarely required to achieve the major acquisition goals, and is usually only asked for if a clear business strategy has not been formulated.

A full integration approach is less targeted than a focused strategy, and often leads to a scenario in which everybody integrates something, but nobody understands the true integration objective and benefit. A lack of prioritization of integration goals will inevitably lead to resource issues, and resource issues lead to frustration. A thought-through change concept does not exist. Consequently, the organization will be very busy, but likely also another example for an unsuccessful integration attempt.

Prevention strategies include:

Management involvement in developing the future organization design
Developing a target operating model (a.k.a. „TOM“ – compare this article)
Leadership commitment to the TOM
Identification and elimination of leadership that will not be part of the joint business

M&A Pitfalls: Timeline? What Timeline?

ROI hinges on investment amount, future income flow, and time. The latter tends to get ignored.

More often than not, I get called to support a project that is past due already. At the time I arrive on site, management has realized that the original timeline cannot be met, and that integration progress and synergy delivery are delayed. In other words: The original timeline is shot, with the knock-on effect that the entire financial model does not work anymore.

Mostly, a lack of planning during due diligence can be identified as the root cause: The effort linked to integration is larger than anticipated, there is no structured project management or controlling, risks and progress (or the lack thereof) are not clearly communicated. In addition, frequently day-to-day business and integration work are not properly aligned, leading to competing priorities.

There are, however, a few things management can do to avoid this scenario:

Start integration planning with due diligence (or even earlier)
Implement a strict project governance
Assign strong managers to the project team
Communicate, discuss and review priorities
Develop transparent project KPIs (financial and non-financial)
Use continuous visual progress reporting
Routine team meetings
Share and celebrate successes

M&A Pitfalls: We can pull it off!

A post-merger integration represents an enormous effort. Many businesses underestimate the resource drain.

Deal preparation is important, however, the true integration effort starts after signing. As a matter of fact, even if you have an in-house M&A team, most of the work lies with functional management and their teams. I have seen very few organizations – actually close to zero – who would have an additional layer of resource available for the occasional integration work.

That is one reason that integration teams are frequently staffed with people unqualified for the job – their only merits were that they were available at the time…. In addition, day-to-day business takes priority in may cases, leading to a distraction of management and their operational employees. If teams get overloaded, frustration builds, people resist change and eventually they may even leave.

Prevention strategies include:

Assess resources before signing
Bring in M&A experienced resource
Align management and set realistic expectations
Consider changing the reward system to achieve integration goals
Create a positive atmosphere for change and creativity

M&A Pitfalls: We’ll be fine!

“Don’t worry – benefits are coming.” Well – sometimes they don’t.

Overestimation of synergies is one of the reasons for unsuccessful M&A projects. If all and any – even remotely possible – synergy effects are included in the financial M&A model, any shortcoming will have an unrecoverable negative impact on ROI.

M&A Managers and C-Level Executives should consider risk adequately in their models. Amongst other, risks may emerge due to timing, market or lifestyle developments, competitor reaction, or innovation/substitution. When pulling the model together, a couple of prevention strategies can be applied to avoid stepping into the “We’ll be fine!”-M&A pitfall:

Calculate major contributing synergies, and apply a decent risk factor
Model what-if-scenarios with delayed timelines
Consider potential competitive retaliation strategy
Play with alternative models of the future
Use corridors instead of fixed numbers

M&A Pitfalls: Justify it!

At times, the result stands before the analysis has even started (photo by Breakingpic on Pexels)

At times, people know the outcome of the analysis before the analysts have started the evaluation process, or even completed their model. They want a certain result – a result in line with their personal preference.

In the context of M&A, such expectation to hit a certain mark can lead to grave consequences, yet still it is not unheard of. Evaluation methods use parameters, and parameters can be changed – sometimes they get adjusted, tweaked and changed until the arithmetical result fits the bill. The downside obviously is that the parameters may not be reflective of reality, risks are being ignored, and sensitivities are left unconsidered in the decision process.

Therefore, an independent check of the model and the applied assumptions is helpful. Other prevention strategies include:

Do not change assumptions without substantial reasoning.
Apply the 80/20 rule: Calculate the most important synergies only, and ignore the rest.
Be sure to have the resource to implement any planned initiatives, in terms of manpower, competence and funding.

M&A Pitfalls: Just get it done!

No Deal – No Gain: Some M&A deal parties would rather close a deal than not, only for their own monetary interest (photo by Pixabay on Pexels)

In preparing a M&A deal, certain groups or individuals may want to see the deal through no matter what.

Banks, consultants and advisors: They all take their share of the deal, and have a legitimate interest to make their piece of the cake as large as possible. However, if a deal falls through, they may still write a few bills, but the lion’s share of the gain is gone; their resource investment is largely in vain.

Other stakeholders may fear that they will lose face or credibility if their proposal to acquire a certain business was rejected. Yet others may view an acquisition as their very own and personal undertaking, and will not support a decision that would mean a stop to their pet project.

The truth of the matter is that rejection of a potential investment due to failed target criteria conformity is a sign of strength, rather than of weakness. Strong leaders and managers stand out in adverse conditions and rather take a moment of heat than carry the long-lasting consequences of a failed project.

A common strategy to prevent the „Just get it done!“ M&A pitfall entails the upfront agreement of certain rules in deal sourcing and preparation, for example:

Monitor more than one potential M&A target
Discuss the possibility of saying “no” prior to due diligence, and be ready to say it if needed
Enable an open pro/con discussion, for example by setting up a „play“ like this one featured by M&A Science.
Define the target financial outcome as part of a structured M&A program.
Use a defined financial model. Do not change it in the process.
Invest into a professional due diligence, and include potential legal/technology risks in the assessment. Confirm asset values independently.
Perform extensive impairment tests on immaterial assets
Do not rely on external consultants only, and build internal capabilities

Setting up Merger Communications

Because M&A is people business, informing and involving people concerned with the program is very important. As opposed to many other workstreams, Communications need to be at the ready on Day 1: People will want to know what is going on immediately with the announcement of the acquisition or merger, not later.

Early employee information should center around

the meaning and external impact of the project,
what is driving the value to customers behind the transaction,
what is expected from the employees,
how and when the implementation of the vision will take place.

While Day 1 communication is a first-level leadership task, ongoing communication can be, and should be, spread out through different organizational levels.

To a normal employee, change is worrying. That’s the reason that common questions target the change aspects of the program. Employees are very little concerned with what the acquisition means to the company and to financial earnings. They worry about the meaning of the transaction to them, personally and professionally. Ongoing communication should address these questions respectfully, and openly. Difficult discussions must not be avoided.

HR may function as the communication center and catalyst, but communication must not be an exclusive HR task. Deployment of various communication tools in parallel has proven to be most effective.