Success factors and effects of carve-outs: Curt Oliver Luchtenberg (Eight Advisory)

Why spin-offs make sense in difficult times like these

There has been a massive increase in the number of crises, technological upheavals and challenges that put pressure on traditional German industries and thus on our entire economy. In addition to classic performance and cash improvement, companies today must also consider the selective sale of business activities that are not profitable or not sufficiently profitable. Such divestments are an important part of mergers and acquisitions, but they are also complex processes that bring many challenges.

Mr. Luchtenberg, what reaction options do companies have that have fallen into crisis in the context of the many global upheavals?

Curt-Oliver Luchtenberg: First and foremost, of course, it’s about tackling sometimes unpleasant issues that were “left undone” in good times. Most of the requests we currently receive are aimed at actively supporting management in optimising working capital management, increasing the efficiency of processes, streamlining organisational structures, optimising asset structures, rethinking sales strategies and leveraging untapped sales potential.

If this “homework” has been done but the company’s situation still does not improve in the foreseeable future, the portfolio must be put to the test. Are there activities that can or perhaps even must be sold in order to minimise losses and/or significantly improve the profitability and liquidity situation? As difficult as it may seem at first glance to dispose of long-established business activities, this should also be seen as an opportunity for reorientation and the development of new business areas.

Which areas need to change the most?

I grew up in an automotive supplier family myself – so it’s incredibly difficult for me to say that the automotive industry remains central here. Not only is the mechanical supplier industry still under massive pressure, but innovative product providers, for example in the field of infotainment, all the way to the OEMs themselves, are facing ever-increasing competition. Another typically German industry is also currently in trouble: the chemical industry. Some large companies are currently undergoing painful restructuring programmes or are even in sales negotiations. By and large, other sectors of “industrial manufacturing”, from the furniture and household appliance industries to mechanical engineering, must also quickly take comprehensive measures.

What are the most important success factors in the implementation of carve-outs?

Carve-outs offer opportunities for process optimisation and value enhancement, which can translate into a higher sale price for the target company and a reduction in operating costs for the buyer. It is important to model new, optimised processes rather than simply copying or retaining existing processes.

Carve-out programmes always involve a degree of complexity for the business units and central functions involved. Regardless of how much planning and preparation goes into the so-called first day after closing, a certain amount of nervousness associated with a change of ownership is inevitable. However, a well-structured programme with appropriate focus reduces risk and ensures continuity of business operations without revenue or process interruptions

Global M&A: disinvestment versus non-disinvestment volume 2023

The share of divestments (carve-outs) was historically around 2% of the total in the years 2005 to 2020. From 2021 onwards, the share of divestments increased significantly and is currently around a quarter of the total volume.

Not all divestments are the same – some are relatively straightforward and require limited transitional support from day one. In most cases, however, companies remain involved for many months or even years after day one.

A clear strategy, careful selection of the carve-out team, early identification of risks, establishment of transition services agreements and clear communication with affected employees are key success factors.

What are the special characteristics of carve-outs in uncertain times?

Carrying out separations in uncertain times carries an additional risk, as the operating environment is not stable: there is less management attention, greater staff concerns, more protracted due diligence processes, more costly price negotiations and, of course, with volatile earnings, more likely sudden terminations even of transactions that are already well advanced.

What recommendations can be derived from this for companies?

Due to the current macroeconomic environment, assets are at greater risk of losing value. Asset owners who are better prepared and can act quickly will counter the decline in value. Five years from now, many investors, executives and operators will know that they have left value on the table during this period – value that was lost either during transaction negotiations, immediate divestment or integration, during years of ownership and/or in the run-up to exit.

However, there is an opportunity to recover strong assets during this period. Smart investors acquire assets that have fallen in price and will regain value over time as the market improves. Assets that are non-core and were not the focus of the parent company can often perform well under the new owner.

Our methodology for disposing of distressed assets aims to get things right from the start so that all parties can move forward quickly together and maximise value. Particularly important are: a clear vision and delineation of the carve-out; agile, flexible and decisive teams; close, transparent and trusting collaboration between seller and buyer after signing; and clear structuring, prioritisation and management of the carve-out.

How can companies ensure a smooth transition for employees and stakeholders?

Carve-outs can have a significant impact on employees. Most employees are concerned about their future and working conditions after the carve-out. It is important to inform them early and comprehensively, to show them what career opportunities the carve-out offers and to take their concerns and opinions seriously. In addition, they should be offered support and training where necessary and possible to make the transition as smooth as possible.

As a counsellor, how do you ensure that you do not just make more work for companies in these already tense times, but help them quickly and comprehensively?

First, by setting the right focus from the start. Because it only makes limited sense, for example, to spend months negotiating better payment terms if the underlying product groups are likely to remain unprofitable, or to undertake costly restructuring in business areas that, from a strategic long-term perspective, have no future in your own company. With our “Acceler8or” programme, we ensure that management knows in three to four weeks which challenges need to be addressed and in what order.

Secondly, by providing management with a small but high-level and experienced number of advisors, colleagues who have themselves held senior positions in automotive, chemical or industrial production.

And thirdly: by taking a functionally holistic view of the problems. Changing the system landscape is not the task of the organisation alone IT. Without the help of the sales, operations, HR and finance departments, even the best computer scientist is often powerless.

Mr Luchtenberg, thank you for the interesting interview!