Driving transformative value creation in private equity carve outs

Rethink the cost model

The carve-out process is an opportunity for you to take a strategic look at the business and establish a competitive cost structure with a financial algorithm that encourages growth and appeals to investors.

For example, when working with an acquirer, we helped identify the new peer group (i.e. competitors in the same sector and of similar size) for the stand-alone business carved out of a consumer products company. Through a qualitative and quantitative benchmarking process, we also defined the target cost structure. The result was a more efficient cost structure that eliminated dis-synergies and was lower than that of the stand-alone business.

Streamline decision making to be more agile

Simply lifting and shifting a parent company’s bureaucratic command-and-control structures into the carve out is a missed opportunity to make the operational decision making more agile and customer-focused.

As part of a carve out, we worked with the consumer products company to inventory all decisions and revise authority levels at an individual and committee level. The aim was to create larger, more satisfying roles that would engage and retain employees and maintain focus on business results.

Exit early from TSAs

Significant effort goes into defining, negotiating and governing TSAs. Traditional approaches work backward from the due date, which can take up to 24 months, with a preference for risk mitigation.

A transformative approach starts before the company is carved out and factors flexibility into the TSA to let the company to do a staggered exit from services. As part of the execution, all necessary resources are put toward the goal of exiting early from the TSA—which is a top priority.

Digitize the technology footprint

The term “lift and shift” is commonly used to describe how technology is transitioned during a carve out, where the parent company’s technology footprint is carried over to the carved-out entity with minimal changes. This is often done to avoid complicating the process, even if the acquirer recognizes that the previous technology footprint is inadequate or overly complex.

Acquirers need to take a look at their technology footprint to identify areas where technology can be revamped to better support future strategic goals. Common examples we’ve seen include the implementation of advanced analytics and data management capabilities, shifting software, platforms and infrastructure to the cloud, simplifying the application landscape or implementing robotic process automation.

Renegotiate and rightsize contracts

Stand-alone organizations don’t need to maintain the same vendor contracts (in number, dollar amount or scope) that the parent company had. You should rationalize these contracts to fit the new organization’s leaner cost structure.

For example, as part of the transition, a company revamped its procurement process and rationalized usage in certain areas, such as IT licensing. The company also eliminated any unnecessary services as part of the legal, contractual transition while maintaining the existing rate structure.  

Foster the right culture

Big companies have big bureaucracies, and carve outs often find it hard to shed this baggage as they transition to a stand-alone company. In fact, 65% of global acquirers say cultural issues hampered their ability to create value in their last major deal.

Fostering an open and collaborative culture sends a message to everyone that your carve out is nimble and responsive. It shows you’re willing and able to move boldly, and with pace, on a new growth trajectory. Flattening the organizational structure and empowering your teams to make decisions will help foster an action-oriented culture from Day 1.