A carve-out transaction can be more complicated than a merger or acquisition, with ample opportunity for unforeseen technology complexities and unplanned-for requirements to add to the cost and time required to achieve separation. So, it is particularly important that buyers invest sufficient time and effort to prepare for IT carve-outs prior to deal completion. Here are some tips I’ve learned on how to successfully manage the challenges of IT and technology in a carve-out transaction.
Determine Newco’s technology requirements and current ownership
The more embedded the carve-out business is in the parent company’s infrastructure and IT support systems, the more complex it becomes. It’s useful to create a matrix showing the different systems and where in the business they’re used – this visual representation will give an idea of the complexity you’re facing.
On the other hand, if the business being carved-out was previously acquired by the parent company it may be that very little systems integration ever took place. In that case the technology carve-out should be relatively straightforward as the buyer will already own its systems.
Know your data
From the buyer’s point of view there needs to be a solid strategy, prior to deal completion, especially around system and data extraction. The seller should have worked out how it is going to separate one part of the business from the rest.
If all of the required data is held in systems that are shared with and owned by the parent company, then on Day 1 there’s little the buyer can do with the data until it’s removed from the parent systems. The buyer will not want to destabilise the business as soon as it becomes a legal entity in its own right so it will need to work out with the seller how the systems will continue to be operated, how long this will be for, and how much it will cost.
There are a number of additional questions around data. How embedded is the data of the carve-out company with the data of the parent company? What tools are needed to make the data compatible with the buyer’s system? How accurate is the data? Is there key data missing? You can’t compare apples and pears. As part of the transition, you need to achieve a standard data model. This may take some time to achieve, you don’t want to risk getting it wrong or corrupting the data.
Define the Transition Services Agreement (TSA)
A TSA will spell out what technology services are being delivered by the parent company to the new company, for how long and at what cost. It will also state who is managing the overall carve-out project. The buyer’s technology due diligence adviser can prepare the technology Schedule for the TSA for the buyer or alternatively they can review a draft prepared by either the buyer or the seller. In terms of due diligence, the buyer’s adviser will ensure that the TSA is fit for purpose and will otherwise act as a sounding board on related matters.
We have advised more than 50 carve-outs in recent years and have developed a proven methodology to ensure that the technology implications for carve-outs are fully understood and that separation from the seller can be successfully achieved.