M&A Science Podcast
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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

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 interview, Liz Lockhart, Sr. Director, PMO, Training and Business Applications, shares her first experience and lessons learned in carving out a competitor.

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Liz Lockhart

Liz is an active leader, MBA, Project Management Professional (PMP), Certified Agile Practitioner (PMI-ACP), Sr. Professional in Human Resources (SPHR) and agile evangelist with more than 8-years’ experience in change management, leadership, organizational development, training and project management. Honing skills and experience gained across technology, consulting and the energy industries, Liz focuses on building highly agile, laser-focused teams with shared accountability and commitment to success.

Episode Transcript

Carving Out Experience

We carved out 400 people from a public company that was about 11,000 employees in total. And we were buying a specific product line from that organization that included capture, archiving, and e-discovery technologies.

Carve-out is much more complex than a normal acquisition because the target was a small portion of a publicly traded company. So not just a carve-out but also publicly traded, which meant significant regulatory approval was required. 

That caused a lot of lead times and increased scrutiny on everything from what information I could receive to what I could send to internal employees in terms of pre-close communications.

What's different because it was a public company

  • There was a long period between signing and closing. 
  • You also have to do a filing so the time to inform folks is very short. 
  • Suddenly I'm very used to working directly with the management team of another company and talking about how they communicate with employees and what is typical in that culture. 

I got that call and a little bit of information in late October. I did not get an actual company name, a publicly traded company. I wasn under special NDAs, so I got as little information as I could. 

In November, we announced, signed, and filed because you have to announce publicly when changing a publicly traded company.

So we had a really tight communications timeline and, of course, noted all those required legal approvals. So we had to be very specific about that language and agreed to acquire this portion of this company.

Between November and February 1 or so, it's a long time when you're sitting in it and you can't have a ton of information for various reasons that we'll go through. 

It was a carve-out of a publicly traded company, and we were competitors. There was very little information I could receive during that time. It felt so slow because I just wanted to get to work, but a ton of desire, just sitting at that starting line, ready to go, revving the engine.

Challenges of Carving out a Competitor

Limited flow of information

There were strict antitrust requirements in addition to normal M&A confidentiality practices. 

We couldn't get product information or a client list during diligence. A tiny set of people were able to get that, but they couldn't share it with me. So I had an idea of what products we were getting brought into our portfolio, but very little information about much else. 

It wasn't until after closing that I got a map of which customer was which. So I couldn't tell what industry they were in, what type of customer they were, government, private, public, etc.

I focus on post-signing and post-close integration. I do not get much interaction with the diligence team. The company that I work for is owned by private equity. And there's a team at that PE firm that does diligence and decides if we're going to do the deal and gets all that set up.

By the time I get brought in, it's decided, yes, the deal is happening, and it's my job to make it valuable. 

The need for transitional service agreements

In a transitional services agreement, it's where you need the seller to continue paying for whatever it was that's going on or operating, whatever it was that's going on, but you're going to pay them for it.

So the seller isn't contributing added value to a business they no longer own. 

The Clean Team

The only way to get this data is through utilizing a clean team tool. It's a group of folks operating under certain protocols before regulatory approval and deal closure. So before closing, these clean team members can get competitively sensitive information to assemble, review, and analyze it. Then, they can get that confidential data between the two companies.

Clean team members had no responsibility for day-to-day decision-making, pricing, selling, marketing, R&D, product development, product roadmap, employee solicitation, and the big deal about hiring. That immediately excludes a good portion of your leadership team

Also couldn't be anybody that did customer or supplier negotiations or held those relationships as a priority. So I had a very slim list of folks to pick from.

I could pluck somebody out of their operations role and make that their entire job. But the risk is if the deal doesn't close somehow, that person cannot work in the business for a while.

So personally, what's in it for me of being on a clean team or going into this role is that if the deal doesn't close, you can negatively impact the future of your employees to that company because you'd be excluded from some stuff into the future if the deal weren't to close. 

Anybody to be nominated to the clean team had to be approved by the council on both sides and leaders on both sides. So you can either decide to do a clean team with all of those stipulations, or you can wait until the close and get all that information.

In our case, we set up a clean team but with insufficient lead time to make it super valuable. Even if you have enough time, clean team members are very limited in what information they can share with non-clean team members.

It's not that a special person can go into a room, get information and bring it to the person that needs it. That's not it at all. The clean team, if they are getting information, they have to summarize it, anonymize it, and then write a written report. It's more homework for them. 

So it should be absolutely noted and underscored that a clean team is not a loophole to get the information that you need when you cannot have it.

Even when you set up a clean team, you will not receive sensitive information about the target if you're not on the clean team. 

I have a recommendation for folks who find themselves in a situation where you can do a clean team or something else. Create a role or a team that works on integrations that can meet clean team requirements the majority of the time. 

So I created a role for a project manager with no direct reports, isn't involved in hiring, doesn't do any pricing selling, go-to-market doesn't own any vendor relationships. So I've created a role that can always meet clean team requirements. 

So if I can skill that person up in integration and knowing what to look for and what to plan for, I then have someone that can help us plan for the future during the period where otherwise folks really can't receive that information. 

Building a Dedicated Clean Team

Designate a role to be skilled in integration planning and meet clean team requirements. So keep them out of some particular things, but you can meet those clean team requirements. 

And then you have this secret weapon of carve-out, especially in a public company knowing exactly what to do. And if you can create and maintain this role, you'll be so much better set up for success in the future.

  1. Find someone with a project management background with an agile mindset 
  2. Bring that person into existing or emerging integrations 
  3. Get them that competitively sensitive information that other people wouldn't be able to receive.
  4. Simulate integration


TSA is extremely customized and fits the situation at hand. Diligence would be helpful with this process. Unfortunately, you don't always get that information because TSAs are often built by the folks doing the work rather than those analyzing it.

Typically, you'll need full coverage for continuity of services, but in some cases, you won't. So you have to talk through every element and say, can we do this before close? Or is this going to be after close item? If it's an after-close item, a TSA is written. So you have to go through everything with very little pre-close information. 

TSAs are not perfect when they get written. And there is always a line that says these can be modified at a mutual agreement, which is super important because you're not going to know everything when you can't have competitively sensitive information about the other business.

When you can't dive into it head first, you can't possibly know everything that it takes to run that business. 

Closing the gaps

Gaps happen; we put our agile head on and say "Things change; we don't know everything; we did our best." So I prefer folks to do is come to me or the TSA manager to tell me about it. 

One of my favorite things about a TSA agreement is when there is a blanket for markup because you can include markup in there.

Do not try to avoid paying a markup on services, pay for the time to split it out. Because TSA have a lifespan and there'll be an expiration date. That really determines how much time you have to do the integration.

Get enough runway so we can actually do the integration, but keep it loose enough so that if we learn about something new or something changes, we can make adaptations. 

Another thing I like about TSAs is that as you knock off those integration items, I'm paying for it as the buying organization. You're not locked in for paying for all of those services throughout the entire TSA. It's until you can turn them off.

So it incentivizes swift integration, but it is there as if you need it. As difficult as it can be, it also allow the selling and buying organizations to have a relationship beyond close.

If we had not had a TSA in place for this, this is what would've just occurred. If you just turn the lights off on me because I can't get it in my name, then I don't have lights anymore. 

Whenever you do a carve-out, customers are always concerned about the continuity of service and product you're delivering to them. So that should be your number one thing always.

Negotiating TSAs

It has to be a collaborative process. So it's really important to have folks on both sides whose job it is at least for a period when they're being established, to care and keep and understand that TSA because you're outlining everything.

Build that relationship and it will not work if it's not collaborative and friendly. I've done recently at current company has been totally virtual. So it's really important, even if a culture doesn't support it to try and show up on video to share your body language, of course, that's 55% of understanding is body language. 

Show up on video and use your other tools, such as words and tone of voice and share a little bit about your life and just encourage a relationship as colleagues rather than adversaries because you're not adversaries, you're selling one thing over here.

These two people didn't individually in most cases make this choice. So what can you do to make it less painful for everyone? Because you're going to find stuff on the rocks that you didn't expect. You have to be able to figure that stuff out in a friendly manner.

Tips for managing a public carve out

Multiple kickoff meetings

One of my jobs as a program manager for M&A is just to repeat myself and make sure everybody knows where we are, what's happening, and what's coming next. 

So keeping everybody informed on what's going on so that they're not doing work when they shouldn't be, and that they're receiving all of the information that they can to make informed decisions. 

Spend time to understand each other's understanding

When I say infrastructure operations, that can be very different to someone in another company. So to spend time and talk about it.

Better planning and timing

Acknowledging what info we would not receive and then moving forward rather than waiting for it. We weren't quite sure how to use the clean team tool. We didn't have that particular person of IMO that could do all that.

We spent a decent amount of time trying to get information, the answer was no every time, but we kept trying. So acknowledging just that you're not going to get this info before close. 

Every deal that I've been part of has a specific list of things that you must do. I encourage people to ask for that list. Get that list of requirements and then work from that. It can be really frustrating when a requirement pops up that you didn't know about when you're planning something. 

Ask Questions

Ask questions, bring the legal team close to you, and bring the team together tightly. Get them in context so that when you send something to a lawyer for review and approval, they know what you're talking about, and why you need it, and they understand the urgency. As they look to approve and then your next steps happen, especially in a highly regulated environment. Make a lawyer your friend, it would be very helpful. 

Define those requirements

If there are requirements for how things are going to work, how integrations will happen, or how employees will be treated or compensated, find out what those things are as early as possible because you can then work them in and then any other change will occur.

Focusing on employee experience and engagement

You don't know what another company is saying about an acquisition. So we spent a lot of time building employee coms, newsletters, and videos saying we're so excited for them to join us. What happens is that if you're not providing some guidance on what's coming next, people fill in the white space. So communication is key

Especially in software, your people are critical to your success. If an entire engineering team leaves just after a deal, you suddenly have a product you can no longer operate or develop.

Be sure to support, nurture, and grow people through this process and be sure everyone feels they have a home and a career in the combined company. 

The first thing we say now is they have a career at this company, there are so many opportunities, and they are eligible not only for growth in their current role but growth in any role at this company that they are qualified for. 

When it gets rough, and it's not working the way you want to, and you're not meeting your TSA requirements, people are what makes that good or bad. So it's always about people, no matter what the numbers, task-oriented folks or deal terms say, it's all about. 

The Exit Dream

Founders and leaders have so much to do with employee retention post-acquisition. They are looked to as a culture carrier in your company. And if you get bought by another organization, and you show your staff like, Oh, I'm not sure, maybe we shouldn't have done that. They see that and it starts to erode trust.

It's the founder or key leaders who influence the employees' outlook of the deal, and what they see for in the future.

And if founders and key leaders aren't saying they're excited about the next step, folks go and start to look elsewhere. So it's really important to be committed to what's next and to show that team that there is a future. You have to sell them on a new dream with that new organization. Super important. 

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