The challenges of carving out a business in a divestiture have grown in today’s competitive deals market. Elevated company valuations mean sellers are commanding impressive prices, but untangling businesses and avoiding extended transition service agreements (TSAs) can be difficult. Buyers may have the capital to pay top dollar for a business, but a higher price places more importance on making a smooth transition and finding synergies in the deal.
In many industries, information technology (IT) enables the heart of a business, and it’s increasingly one of the biggest areas of both risk and opportunity in divestitures. Consider that IT is often the single largest general and administrative (G&A) expense due to its complexity and importance to the broader organization. Given how integrated many IT environments are, full separation in a divestiture often takes time and presents multiple considerations.
To improve their chances of separation success, both buyers and sellers need to plan for IT earlier in the process, which can accelerate the transaction timeline, enhance deal value, and reduce one-time, run-rate costs. Engaging IT at the onset of a deal—even before due diligence—allows the companies in a transaction to better drive digital transformation.
The typical divestiture approach is sequential, which can delay value creation in the deal. But expediting the timeline while mitigating risks is possible. For instance, one tech company carving out a highly integrated $4 billion business developed an enterprise architecture, roadmap and one-time cost estimates before the deal closed. That allowed for a TSA of only six months while creating a platform for future M&A. Not only did this result in fewer TSAs, but the seller was able to extract more value from the deal because it could show a path to greater EBITDA through digital transformation.
One key to accelerating business benefits is running digital transformation with the same rigor as an M&A deal. During diligence for the business being divested, a seller can employ best-in-breed, industry-specific enterprise architectures to develop an end-state IT architecture, a transformation roadmap and estimated one-time and run-rate costs. Then, once the deal is signed, the buyer and seller can kick off parallel workstreams for Day One transaction closing, TSA exit and digital transformation. Running those workstreams concurrently can allow the acquirer to deploy a foundational IT architecture in record time.
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Companies can take several actions during the divestiture process to make for an easier IT separation that successfully helps drive transformation.
Divestitures can be ideal opportunities for both sellers and buyers to reimagine their organizations. About a third of corporate acquisitions are cross-sector deals, with many types of companies pursuing tech firms or assets in adjacent industries. Meanwhile, companies that proactively and strategically increase focus on core capabilities can become less complex through divestitures and wind down systems that are no longer needed. That greater simplicity can make it easier for a company to consider and complete a transformation.