How technology can make or break a carve-out

Technology has long been a critical element of M&A transactions. Handled correctly, it can be a key driver of value, enabling business processes to operate more efficiently, but done incorrectly, it can have devastating consequences, write Anthony Treccapelli (pictured) and Yawar Murad.

Carve-outs involve the separation of a business unit or assets from a larger corporation to establish a standalone entity. In our turbulent economic times, these transactions have become increasingly popular with corporate and private equity investors, as companies have refocused on core operations and sold off business units to raise cash or dispose of non-strategic assets.

Structuring and managing technology in a carve-out transaction can be a very complex undertaking, and CIOs must be given sufficient time to plan ahead. In the heat of the deal, those leading the transaction believe that the technology will just work, and not enough time is spent ensuring that critical infrastructure, legacy systems and systems provided by the seller are still available during the transition period. CIOs therefore have a duty of care to ensure that risks are managed and the 'carved-out' entity can operate post-transaction, without depending indefinitely on the seller's transitional systems.

Overcoming the IT challenges of successful carve-outs:
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Consider the experience of a major chain of health clubs that acquired additional clubs through a carve-out. While the acquiring business assumed it would easily be able to transfer data for customers of the other clubs, the process went awry and disrupted the billing systems. Some customers received the wrong invoices. Others received no bills at all. There were breakdowns in the process through which monthly membership dues were paid. Revenue plunged and cash collections dropped dramatically within a month, causing the company's banks to shut off its credit line and forcing the buyer to make a major, unplanned capital infusion. A situation that was entirely avoidable with up-front planning had put the very future of the company at stake and radically altered the deal's economics.

Therefore, CIOs must make sure IT is well represented when the deal is struck. We believe that firms should apply the following model, which has three distinct and tightly sequenced phases:

Seamless operations

The first imperative is that the business must be operational on Day 0, i.e. when the deal closes. A common way to ensure this is to establish a robust transition services agreement (TSA), an agreement that contractually binds the seller to provide continuity of service for a limited period of time. TSAs should be well-defined and closely managed to enable continuity of critical IT services, while separation from the seller is planned and executed. Poor TSAs, where services are missing or under-specified, or where financial responsibility is unclear, can result in conflict and business under-performance during this critical transition period.

Stabilise and separate

Once Day 0 is successfully delivered, CIOs must move quickly to separate from the seller, and ensure their carved-out entity is capable of standing alone.

Separation can be a tricky exercise, depending on how intertwined the carved-out business is with the seller. Splitting shared systems, making technology selection decisions, assigning/renegotiating contracts, selecting strategic vendors, etc. are time-consuming at the best of times, and can be seen as a distraction when the business is trying to stand on its own two feet.

CIOs must not let the perfect become the enemy of the good enough, and can use this opportunity to demonstrate a hard nose for business. Buying new technology assets, for example, will impact capital costs, while renting them via an outsourced/cloud solution can be expensed, which can lower initial spend and increase the speed of implementation. The bottom line is stabilising the business quickly before the TSA term runs out, and leaving perfection for a later date - in our experience, a bias towards action will be well served here.


Those who are most successful with carve-out transactions choose to optimise IT assets after they have successfully stabilised and separated the new entity. Quite simply, this is the bottom line for the CIO.


Anthony Treccapelli is a managing director at global professional services firm Alvarez & Marsal. He leads the Information Technology Solutions team in New York.

Yawar Murad is a director with Alvarez & Marsal. He is a member of the Performance Improvement practice in London.

Alvarez & Marsal is an independent global professional services firm which draws on its deep operational and turnaround heritage to help companies across the industry spectrum improve operating and financial performance, and to navigate business, litigation and tax matters.

Overcoming the IT challenges of successful carve-outs:
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(requires registration)


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This was first published in March 2011


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