How can we separate in a way that leads to a better, brighter future – not years of difficulty and expense?
Some spectacular separations of late have included Jeff and Mackenzie Bezos, Kim Kardashian and Kanye West, and of course Britain and the EU. But while these are all high-profile, expensive separations, what we are concerned about is separation in a business context, and specifically, how we should best prepare and implement a separation or divestment.
Before we can understand the best way to implement a separation, we first need to understand the context and motivations behind it. In an M&A and business context, the following are the three most common reasons to separate.
- To raise capital for investment elsewhere – Whitbread sold Costa Coffee for £3.9bn in 2018, freeing up capital to invest in growing its Premier Inn brand globally.
- To re-focus on the core strategic area of the business – Kraft-Heinz has divested many brands to focus on its core offerings, for example, the sales of Planters nuts to Skippy for $3bn.
- To unlock value when businesses are worth more apart than together – GSK plans to separate its consumer healthcare business from its biopharma business in 2022 to achieve this aim.
The driving force behind a separation or divestment will dictate the strategy needed to ensure success, whether that’s to achieve the best return, ensure the fastest exit or simply set the new entity up for success.
How to separate
Once the decision to separate has been made, a fundamental next step is to decide the type of separation to pursue.
- Carve out – Unpicking the tangled web of systems and services ready to migrate to a new owner, for example, G.E. selling its life sciences division to Danaher for $21bn.
- Spin-off – Developing an entirely new standalone entity and then listing it as a separate company, for example, United Technologies spinning off OTIS, the elevator company.
Either option is likely to require continued support from its parent to maintain operations, which takes the form of Transitional Service Agreements (TSAs), and so will form an integral part of the planning process.
Separation is complex and demands careful planning and execution. Before setting out on such an undertaking it is imperative to understand the challenges.
- Shared services – Creating a standalone operating model and ensuring the right people, processes and systems are in place.
- People – Developing a strong management team with the right knowledge and resolving any key person reliance issues.
- Contracts – Splitting all vendor contracts while managing any loss of economies of scale.
- Data – Agreeing on the continuation of data flows between the organisations.
- TSAs – Scoping and costing the full suite of TSAs and understanding dependencies on external factors.
- Right-sizing – Understanding what further programmes are required to achieve the value of the separation for the retained business.
- Tax, legal and regulatory – Covering all risks associated with this complex framework, especially in relation to pensions, stakeholders and regulatory bodies.
Most deals are completed with a small top-level team, where detailed knowledge of the business is often not readily available. Therefore, all the assumptions must be refreshed once the deal is announced to ensure accuracy and no unexpected curve balls. A good example of this would be to restate the TSA requirements so nothing ‘falls over’ on Day 1.
Planning for success
Once the core set of design questions have been answered, it is time to begin the separation journey. To ensure success, there are four golden rules to follow.
- Set up a dedicated team – In our experience, without a dedicated team to focus on the separation, there will be an impact on BAU activity, as key resources are stretched. This also allows the team to transition to provide continuity and support for the nascent organisation.
- Develop robust plans and governance structures – Without clear decision-making and accountability, the separation cannot succeed. Through quick escalation and fast, decisive action, we previously resolved an issue that was delaying the programme due to a vendor not delivering.
- Communicate and bring people on the journey – Develop a vision that can be clearly articulated and understood by investors, employees, and partners, so everyone feels they are working towards the same goal. Even the janitor of the NASA programme knew the vision was to put a man on the moon.
- Implement rigorous TSA and vendor management – We have seen TSA delays lead to an overspend of millions of pounds in avoidable fees. Adhere to the terms of the contract while carefully managing the ‘grey areas’ to ensure value. Similarly, vendors tasked with the separation or intrinsic elements must be tightly managed to ensure timelines and quality.
The success of any separation or divestment will ultimately come down to the financial terms of the deal and the value it creates for stakeholders. However, if not adequately executed, the true impact of separation can be felt for years after the deal is completed, as management’s focus and attention remains occupied.
Smooth separations do not just happen. By planning for success and delivering to plan, the organisation is free to pursue its strategic intentions and the divested entity is set up for success.
At Gate One, we are M&A post-deal integration and separation specialists. We support strategically important initiatives that make a difference.