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Exit stage left: Accelerating tech separation in divestitures

Summary

  • A company’s technology systems and processes are a crucial aspect in a divestiture because their complexity can affect your ability to separate businesses.
  • Focusing on digital transformation and enterprise architecture even before a deal is signed can help accelerate value for both the buyer and seller.
  • Then, during the divestiture process six key actions can help to make for a smoother IT separation.

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.

  • Maintaining business performance and minimizing disruption usually involves TSAs, and those can limit the flexibility of a buyer and a seller to make meaningful changes to their respective IT architectures.
  • When envisioning the possible future state, legacy technology may not be appropriate for the separated business, whether it has been acquired or spun off.
  • Similarly, business processes may not be suitable for the smaller size and scale of the separated business. Legacy systems can mean high operating costs for the business.
  • Keeping business and tech strategies aligned is crucial for continuity and can prevent constraints to business growth, including future M&A.

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.

How to move faster and realize more value

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.

A tech-accelerated transformation during a divestiture provides value through simplified business processes, optimized architecture and reduced G&A costs.
Value for the seller  Value for the buyer
  • Cash in the door quickly with a reduced sign-to-close timeline
  • More immediate focus on its core business as a result of reduced TSAs
  • Reduced cyber risk exposure with less entanglement with the buyer after Day One
  • Best-in-breed platform for the future business
  • Reduced operating costs and improved EBITDA
  • Flexibility to grow business more quickly as a result of fewer TSAs and faster TSA exit

Next steps for carve-out success

Companies can take several actions during the divestiture process to make for an easier IT separation that successfully helps drive transformation.

  • Start with an entanglement analysis to size operational complexity, build the separation strategy, determine one-time costs and set a timeline for the divestiture.
  • Engage business leaders early in decisions to drive stakeholder alignment and ensure business resource commitment, then leverage automation and digital tools to provide consistent reporting across stakeholders.
  • Set up strong governance and a clear escalation matrix to expedite the resolution of critical issues.
  • Institute a strict change control process to manage “scope creep” from new requirements, and use preconfigured solutions and conduct clean sheet workshops for faster gathering of requirements.
  • Align the data migration plan to ensure testing and mock cutover are done with production data to minimize impact after going live. (Mock cutover can include such actions as simulating the move and developing code to enable the future state architecture.)
  • Establish strong change management with frequent demonstrations and touchpoints with business leaders to assess readiness to adopt new solutions.

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.

 

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Michael Niland

US Divestitures Services Leader, Georgia, PwC US

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Simon Singh

IT Deals Partner, PwC US

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Joseph Joy

IT Deals Partner, PwC US

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