Generating value in carve-outs.
A chance to generate value for the remaining and separated companies may arise only once in a lifetime through separations. The key lies in examining support costs in detail and focusing on the talent aspect at a personal level.
The reason for merging or splitting companies should always be the same: to increase their value. However, some leaders view separations as the opposite of mergers and acquisitions (M&A) integrations, in terms of creating value in the short term. While M&A can unlock value by realizing synergies, it does not necessarily mean that separations must be a drag on near-term value creation. This assumption is often due to the belief that the separated entity needs to rebuild the same support structure that it had as part of the original company, or because of perceived risks to business continuity.
Separations have costs and risks, but like any major business decision, they should be evaluated through a cost-benefit analysis. The perceived costs of separations are often greater than the actual costs. For example, while CarveCo will need an effective support structure, it does not have to be the same expensive structure that it had under RemainCo. The scale benefit of general and administrative (G&A) costs can be overstated. While there is a possibility of business disruptions arising from separations, it is often better than standing still, and identifying potential disruptions can mitigate or prevent threats to business continuity. Employees of CarveCo may feel uneasy about the changes, but they can also be reinvigorated by the transformation and inspired to make the new company even better.
Deciding whether to keep or divest a company is highly dependent on the specific facts of each case. While the term "separation" can encompass various types of transactions, common lessons apply. The most important lesson is that separations offer a unique opportunity for both transacting and transforming by asking the question, "what creates the most value?" Doing things the same way they have always been done is usually not the answer.
The variance in general and administrative expenses (G&A gap) is substantial between high and low performers across various industries. Recognizing and rectifying this gap can result in considerable value.
Achieve transparency. To begin a separation, it's essential to achieve transparency. This involves understanding the specific roles, activities, assets, contracts, and people that support each business. This level of transparency goes beyond a surface-level review and requires breaking down the business into its constituent parts, much like a mechanic disassembling a motorcycle. The goal is to achieve clarity at a micro level, identifying the resources a company should use as a stand-alone business. While this level of detail may seem daunting, there are templates available that companies can use to create detailed and structured fact bases. These fact bases help companies to identify inefficiencies that could be eliminated or reduced, leading to cost savings.
Compare and contrast with peers. Comparing and contrasting with peers is essential to understanding the right size of a business. Businesses should focus on comparing levels of automation, specialization, interfaces per process, IT systems, and legal conditions with peer companies. However, it's essential to keep in mind that while it's valuable to learn from peers, companies should not aim to be like their peers or RemainCo. For example, one separation showed that CarveCo's finance function was larger than other companies in the same business benchmark. After further examination, the senior team discovered that the finance function was contributing to a number of value-adding strategic projects for CarveCo, and so the transformation efforts were focused on how to improve the function rather than reducing it.
Be open to nuance. Achieving meaningful opportunities requires teams to get granular and understand the specific activities that CarveCo needs to conduct. Some activities can be outsourced or stopped entirely, and businesses need to identify the appropriate level of support their businesses need, including spans of control and reporting lines. By examining individual use-case examples, companies can identify significant efficiencies and avoid the trap of oversimplifying into "keep/outsource/eliminate" outcomes. For example, a function that employed ten or more people when the business was part of RemainCo may not need to be eliminated or outsourced, but instead reduced to a smaller number of people.
Rethink technology. Technology is unique in separations as IT is a separate function, and it should be scrutinized for potential cost savings and efficiency improvements. However, the use of IT systems, infrastructure, and support is integral to every part of CarveCo. Companies should examine their IT systems to determine which ones are necessary and which ones can be eliminated or reduced to save costs. Common applications can be used to perform many of CarveCo's core needs, but companies should also consider the potential value of investing in new technology.