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At a time when asset disposals and reconfigurations of strategic areas are driving the M&A market, IT separation is vital to the success of these transactions.
Driven by private equity funds, divestures or carve-outs have become common place in M&A transactions. With the funds looking to awaken some of these "sleeping beauties", the complexity of the information technology part of these transactions makes it a particularly perilous exercise.
IT topics are often on the critical path in these carve-out operations and sometimes prove to be the cause of delays in business value creation. They can also add significant additional costs if the challenges of separation have been underestimated.
Succeeding in cutting the cord with the parent company is not easy, especially when the information systems are intertwined in such a way to centrally provide IT shared services to the various parts of the group. It is vital to understand the challenges of IT trimming upstream to avoid unpleasant surprises. Calculating the cost and time required to 'untangle' these systems is necessary, even if it can sometimes cause the potential buyer to question the true value of the transaction.
The complexity of these IT separation programs can exponentially increase if they are combined with a business value creation program, a merger or an integration with another company.
Having successfully led multiple IT separation and integration programs, we have developed a deep expertise in delivering these complex projects in a record timeline to exit Transitional Service Agreements (TSAs) on time and on budget and enable the investors to achieve the value creation program.
Calibration of TSAs:
It is crucial to estimate the cost and the timeline to spin off the target business from its parent company throughout the due diligence and closing preparation phase. This involves reviewing shared services, shared applications, shared infrastructures and group contracts.
It is vital that the buyer to estimates the duration and service levels for TSAs in order to ensure a smooth transition and business continuity while the target business sets up its own information system.
At the same time, the seller must make sure the data will be fully segregated after the deal is closed. This means ensuring access to all those shared services, software and equipment under TSAs while ensuring the confidentiality and integrity of information between the business being sold and its former parent company.
Value creation program:
Such a transition is also an opportunity to properly size the new information system of the newly independent company. This can identify potential savings, as well as additional costs due to potential loss of the negotiating power for the new contracts.
Among the many issues that need addressing in these separation projects, intellectual property and intangible assets can create unpleasant surprises when the autonomous company finds itself without a crucial license or IP for its activity.
These transition periods can also be used to progress digitization or to embrace best practices within the sector.
Finally, we must not forget to validate the consistency of the carve-out roadmap and that of the business value creation program, which depends on the possibilities offered by the information system. It still happens that the "Value Creation Programs" are disconnected from the IT realities. This can lead to major disappointment. It may therefore be necessary to readjust the program to recognise its dependency on the information system and the impact on the pace of implementation.
I’ll be more than happy to share our lessons learned in this field and also hear from you, if you have similar experiences.
