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Carve-outs are incredibly complex. Buying a small part of a target company brings many challenges and can be even more complicated if the acquirer is carving out a public company. In this article, Liz Lockhart, Senior Director (PMO) and Training at Smarsh, shares her first experience and lessons learned in carving out a competitor.
"People are what makes deals good or bad. It's always about people. No matter what the numbers, folks, or deal terms say, it's all about people." - Liz Lockhart
Challenges
Carving out a publicly traded company adds complications because of the added regulatory approvals. The transaction's lead time also increases significantly due to added endorsements from lawyers and executives from both companies. Communications are much more challenging because of the announcement.
During Liz’s past experience, the complications resulted in a tight timeline and restrictions on the information shared with internal employees. In addition, the deal became more complex because the target company was a competitor. Due to confidentiality, the seller only shared basic information, which did not include product information, client list, or any other competitive information. The lack of information made diligence extremely difficult.
Clean Team
There is an exception to the rule, the clean team. They are a group of special people operating under specific protocols before regulatory approval and deal closure. The clean team can access competitive and sensitive information before closing for analysis and review. However, the clean team cannot share sensitive information with other people. Instead, they have to summarize and anonymize the information to maintain confidentiality.
Not everyone can be a part of the clean team. The team is made up of very specific people who do not have any responsibility regarding:
- Day-to-day decision-making
- Pricing
- Selling
- Marketing
- R&D
- Product Development
- Product roadmap
- Employee solicitation
- Hiring
- Customer negotiations and relationships
- Supplier negotiations and relationship
Liz and her team couldn't utilize the clean team rule because they weren't prepared. However, after learning about a clean team, they created their own dedicated, clean-team-ready role for future transactions.
Transition Service Agreement
TSAs are almost always necessary during carve-outs. A TSA is when the acquirer pays the seller for their services to keep the business going because the acquirer cannot operate it themselves. Every service needs to be specific for each function so that the seller can come up with accurate pricing for each service. Deciding on a TSA can be challenging if the acquirer has minimal information regarding the business's operations.
Liz says TSAs will never work unless they are collaborative and friendly. Both entities must focus on business continuity and consider the people involved in the transaction. At the end of the day, people are what dictates whether a deal is successful or not.