With M&A due diligence windows shrinking and access to management dwindling, it’s more important than ever for buyers and their advisors to have a well-defined divestiture approach.
Yet too often, their approach is solely focused on standalone run-rate and one-time costs rather than identifying potential value from a top-line revenue, profitability, and cashflow perspective.
These buyers, in their urgency to establish the carveout separation, also risk replicating inefficient systems and processes.
To gain a competitive edge in the bid process, strategic and private equity buyers should look beyond these conventional approaches and seek new ways to unlock divestiture value. Here’s where we recommend starting.
The traditional separation management office (SMO) is a vertically aligned model that oversees separation tasks for individual departments, functions, and workstreams. The emphasis is on program governance such as status reporting, risk logs, and workplan collaboration.
Instead, take a more holistic approach—which creates financial value in addition to separation. For instance, value management office models aim to deliver traditional SMO functions and capture value through projects that span horizontally across departments—eliminating barriers and driving consensus to accelerate EBITDA improvements post-transaction. This vertical and horizontal lens provides a holistic approach across the entire enterprise, allowing NewCo to achieve separation and financial value creation faster by leveraging the diligence and sign-to-close period.
For example, the VMO drives consensus with traditional workstream separation planning and value creation projects that focus on top line revenue, talent, and technology transformation. By working closely with our alliance partner ContinuServe and other outsourcing providers, we collectively achieve a higher degree of confidence solutioning an optimized standalone run-rate costs in an accelerated time to achieve—and in some cases guarantee—cost takeout estimates identified during diligence.
Leading companies use the inflection point of a carveout to identify valuable use cases for their data assets, whether it’s through predictive models to drive growth via cross-selling and reduced churn, direct monetization of proprietary data via new revenue streams, or other value-creation opportunities.
Identifying and prioritizing these use cases early in the diligence and/or planning process can create quick wins while engendering confidence in larger, longer-term monetization efforts.
For instance, investments in data platforms and new hires with advanced data analytics skills can be time-consuming efforts for a newly divested company. Being clear about how data analytics support the company’s growth strategy, however, allows a company to invest in these initiatives with intentionality and conviction.
Divestitures also offer an ideal opportunity to take stock of a company’s talent strategy—and uncover new value.
In a tight labor market, knowing how and where to effectively utilize contractors, outsourcers, and automation not only cuts costs but also increases employee (and therefore customer) satisfaction and retention—all while providing newly formed companies with the flexibility to scale operations faster than their competition.
To set this in motion, buyers will need advisors who can leverage global benchmarks, regulatory considerations, existing employee skills data, and decision trees to assess which roles can be outsourced or contracted out. Productivity experts, meanwhile, can help identify processes that can be automated.
A target’s technology stack is often comingled with the parent’s environment, which can include inefficient applications and unsupported infrastructure—which results in an overly complex solution and cost prohibitive. NewCo’s technology solution can benefit from these legacy constraints by performing a cost benefit analysis and right-size the environment that meets both operational imperatives and strategic needs of the business.
Buyers often lack experience in diligence TSA negotiations surrounding the terms and conditions or TSA scope, price, and duration—which often results in the buyer having to develop a two-step NewCo solution: Exit the TSA with an interim technology solution, then redesign technology environment that meets future business requirements.
Having a one-step solution reduces one-time cost and allows NewCo to focus on other business priorities such as growth and customer satisfaction.
The technology transformation solutions implemented by West Monroe leverage our intellectual capital from past carveouts and industry benchmarks to quantify the hard and soft value created by technology investment. A technology transformation solution provides executives with the bespoke plan they need to avoid unnecessary technology investments.
PE deal teams should be aiming to underwrite technology with a digital mindset within their deals. In an increasingly competitive M&A market, those who stick to a “separation only” approach to divestitures will likely miss the mark. Unlocking additional value creation opportunities—through talent, technology, data analytics, and a Value Management Office (VMO)—can help potential bidders stand out from the crowd. being digital includes the technology transformation attributes
By working closely with our alliance partner, ContinuServe, and other outsourcing providers, West Monroe’s carveout team collectively enables a higher degree of confidence with standalone run-rate costs in an accelerated time to achieve cost takeout estimates identified during diligence.
West Monroe’s value management office (VMO) also leverages Intellio Deliver, a SaaS solution that tracks real-time status reporting and workplan development in an efficient solution resulting in improved collaboration and reduced investment from NewCo functional leadership.