Maintaining Balance with Divestitures and Carve-outs: An Information Technology Toolkit for Success

June 2019

By Russell Clarkson, Managing Director – Technology & Business Transformation Services, BDO USA, LLP

Business is about staying in balance. We work hard to ensure that each aspect of our business receives the attention it needs to stay at its highest performance. Change, by its very nature, will disrupt the traditional patterns of work and generates energy that opposes our standard procedures. One of the greatest disruptions to business is being on either the buy- or sell-side of a divestiture or carve-out. At the heart of this disruption, stands information technology. Consideration on the preparation, execution, and management of key activities must be brought about by the management team responsible for the information systems.
 
When we look at any transformational event, information technology has become an important component and often accounts for over 50% of the expected synergies reaching into all aspects of the transaction. Demand for divestitures and carve-outs is expected to remain high, with BDO’s recent Private Equity PErspective Survey showing it as one of the top three drivers of deal flow. How can information technology departments prepare for this type of event?


Preparation

While not all divestitures are created equal, they each come with a level of complexity that must be managed to minimize disruption to current and future operations. Information technology stands behind most major business decisions, yet often is considered only after a key operating decision has been made. Rather than lament that operating executives should be more inclusive, it is incumbent on the information technology team to prepare for any changes that the executive team decides to undertake. In advance of a divestiture, there are key focus areas— similar to the actions that a management team should be taking as an aspect of their ongoing operation—that should be addressed:
  • Strategic Alignment – Rarely are systems isolated to specific business needs. Identifying information technology alignment will help to improve the ability to separate systems and key functions. Understanding how the technology aligns with the retained and divested portions of the business will provide input to the transaction services agreement and guide additional development efforts that may be required to successfully separate a portion of the business.
  • Data Management – Understanding the master data source and ownership of key data elements will ensure that the quality of the data is maintained as systems are isolated and prepared for a potential carve out. With the explosion of data sources, this can be a difficult undertaking to wait until the decision to carve out or spin off a division is made. Systems where data may be embedded, including help desk systems, email, back up and employee file locations should not be overlooked.
  • Architecture – As systems grow and mature, there is a tendency for complexity to build within the application and infrastructure architecture. It is important to ensure that the architecture documentation is current and reflects the existing configurations that are being managed. Discovery tools can help to not only identify all elements within the environment, but also release levels and potential vulnerabilities.
  • Governance – Leveraging existing IT governance structures and decision frameworks can help build a baseline that will support existing operations while providing direction for M&A and divestiture activity.  

Execution

When it comes to the execution of the transaction, information technology must move into a leadership role. Time becomes a critical resource and direct engagement is required to minimize the potential negative impact that delays can often create.
  • Governance – Once the divestiture process has started, the governance structure needs to shift from one of planning and design, to a program management team that can guide decision making and risk mitigation during critical phases of the transition.
  • Transaction Services Agreement (TSA) – Created during the negotiations, the TSA now becomes the guiding hand for decisions regarding ongoing support and maintenance of systems. Completed during a transaction negotiation, the TSA may not have accounted for all contingencies, but should be able to guide discussion to resolve potential differences.
  • Organizational Maturity – The selling and buying organization may have different maturity models for how they build and maintain systems. The ability to reconcile the process and approach during the transition may require additional investment, particularly in the case where the divested entity represents a new company and may require some functions to be built from scratch. 

Management

It is important to not lose sight of your business while a transition is underway. Traditional metrics for business success may need to be supplemented with additional metrics to guard against a negative impact to the customer experience or ability to manage back-office processes.
  • People – It falls on both organizations to ensure that the right balance of skills and capabilities are associated with the divested entity. Evaluation of personnel will help determine skill levels of people and gaps in the organization that may exist during the transition. This can be supplemented with consultants and contractors, but ultimately a good assessment needs to be done to ensure both divested and retained systems are provided the correct level or support.
  • Stranded Assets – As the separation completes there may be systems or pieces of technology that overlap other functionality. The retained organization must be sized properly for the level of business that is being transacted. All inputs and outputs across systems must be satisfied as key components are removed.
  • Roadmap – Gain agreement from all parties on the transition roadmap. Once a plan is in place, progress against goals and key dates can be measured. Include a risk assessment to identify potential impacts to the roadmap and work on having a Plan B in place for each one.
  • Adjacent Impacts – Nothing happens in isolation, so now is the time to determine if anything else needs to be considered. There may be other initiatives underway around a new product launch, the replacement of a key system, or a new vision to reflect a post-divestiture world. Measure the potential impact of each of these initiatives against the staffing required and the activities that need to be addressed.
When out of balance, it is difficult to recover. A divestiture comes with a lot of activity that will work to pull you down into the details and can cause you to lose sight of the bigger picture. Use time to plan and have a governance structure that can provide the guidance and decision authority to reduce risk and keep the project on track. A successful divesture provides great value to both the buyer and the seller when done correctly. Understanding the unique aspects of these types of transactions will provide the knowledge needed to navigate the journey.