A carve-out represents the sale of a business unit, division or a part of an enterprise. Over the past few years, divestitures have accounted for a rapidly increasing portion of M&A activity. The rationale behind carve-outs is to getting rid of business units or subsidiaries which don’t play a key role in the business and are no longer a strategic fit and want to become more focused and responsive to the market. As economic conditions deteriorate, the need for cash becomes the more prevalent reason for divestiture.
A seller’s primary motivation for pursuing a carve-out is often to convert non-core assets, which may be under-funded and under-managed, into cash. This allows a business to focus financial resources on the core business. Carve-outs can represent value enhancement strategies by providing fresh capital for the growth of the core business.
According to Accenture Strategy research, 83% of companies now consider carve-outs to be an important strategic tool to drive competitiveness in the next few years. One of the main benefits of carve-outs is that the business capitalizes by selling non-core assets and hence can invest the proceeds in more productive ways. Under the current environment, it may make sense to assess the business and identify non-core business units which may be divested in an effort to generate additional capital and deploy it in more strategic areas of the business.
In an effort to maximize value, we recommend taking the following steps:
- Adopt an ongoing strategic divestiture plan to review asset performance and validate whether it does still make sense to keep the assets under the current conditions.
- Plan ahead of time and make key decisions before it is too late – you will avoid short-selling the assets.
- If you decide to pursue a carve out, prepare the assets for a potential buyer and avoid due diligence issues.
- Set price expectations with the buyer.
- Identify potential deal hurdles.
- Communicate effectively.