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Dealmaking can be a key part of a company’s transformation strategy. Transformational deals can require a lot of resources, and being able to quickly produce financial outcomes can help fund those transformation activities.
One area where we’re seeing many companies produce quick financial wins is in transition service agreements (TSAs), which spell out how the seller will continue to operate some functions of the carve-out while it’s being integrated by the buyer. By exiting a TSA as fast as possible — sometimes in half the given duration of the TSA — acquirers can increase speed to market and boost value creation opportunities.
Speed in exiting as a value creation opportunity
As critical as a TSA can be, it can also leak value for both parties. Buyers start realizing the full potential of the business only after they control it on their processes and systems. And sellers are often eager to end the TSA because it’s an additional burden after having sold the carved business. Sellers must balance that desire with the stranded costs they have to manage in order to end TSAs faster.
While TSAs can offer important benefits, their complexity makes them costly to exit in a timely manner. Entangled legacy systems can be difficult to untangle and recreate in the new owner. A typical TSA exit requires more than 1,500 design decisions, and most are interdependent. This can often lead to revised decision-making, and that’s extremely inefficient.
The complexities are not always limited to technology entanglement. Carve-out buyers often end up with overruns in their budgets for one-time cost and EBITDA. That’s because the buyer has involved too many vendors during the sign-to-close phase, which can have a cascading impact on the entire deal timeline.
Better business outcomes
While there’s no one-size-fits-all approach, we’ve seen repeated successful carve-outs in the last three years where companies achieved an 8% to 11% value uplift in deals fueled by a combination of factors but primarily:
- About a year of additional business value capture by exiting TSAs early (PwC analysis shows around 5% to 7% uplift).
- Companies also benefit from savings from not paying TSA markup due to early exit (PwC analysis shows uplifts of 0.5% to 0.8% are typical).
- Additional business synergies captured through levers not previously considered feasible in deals. For instance, PE deals in which tax increment during TSA exit led to a 0.8% to 1.3% value uplift, PwC analysis shows.
- Adopting a fit-for-purpose IT system using pre-packaged accelerators (e.g., ERP solutions) that enabled companies to achieve an additional 1.5% to 2% value capture, PwC analysis shows.
What dealmakers should know
Here are things to consider when trying to craft a TSA strategy that will help create value more quickly.
Initiate expedited exit strategy planning
Dealmakers can focus on assessing carve-out strategy during the pre-sign phase through an in-depth assessment of standalone model (including IT) and entanglement analysis. Identifying and establishing a blueprint for the high-level TSA strategy (logical versus physical separation) by functions early in the game can give you a head start to an expedited TSA approach.
Prioritize rapid value creation
Company leaders can follow up their pre-sign phase assessment with detailed value capture enablement planning during the sign-to-close phase. Prioritizing rapid value creation can help your company achieve financial outcomes without having to wait for all IT systems to be separated.
Plan risk-modeled separation planning
Dealmakers can create and initiate planned execution of expedited TSA exits and the operating model during the sign-to-close phase. Timely planning on high-risk and high-cost variability areas (e.g., upgrade for critical out of support systems, helping mitigate security vulnerabilities, etc.) can be key to recognizing opportunities for greater value capture.
Rather than check-the-box on a traditional TSA, dealmakers can focus on this new approach. It can help you expedite value capture by completing your TSA exit in 6 to 12 months instead of the typical 12 to 24 months.
We want to give a special thanks to Rohan Iyer who contributed as an author to this piece.
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