A carve-out transaction can be more complicated than a merger or acquisition, with ample opportunity for unforeseen technology complexities and unplanned-for requirements to add to the cost and time required to achieve separation. The carve-out is like a startup in many ways with even more complications. So, it is particularly important that buyers invest sufficient time and effort to prepare for IT carve-outs prior to deal completion. Here are some tips I’ve learned on how to successfully manage the challenges of IT and technology in a carve-out transaction.

Determine Newco’s Technology Requirements & Ownership

The more embedded the carve-out business is in the parent company’s infrastructure and IT support systems, the more complex it becomes. It’s useful to create a matrix showing the different systems and where in the business they’re used – this visual representation will give an idea of the complexity you’re facing. Careful attention should be made to discover all internal systems used by the scope of business being carved-out.

In the present environment, many of the larger, business critical software licenses from companies like Microsoft, Salesforce, and Oracle cannot be assigned. For day 1, the company formation needs to be complete and enterprise agreements and master service agreements need to be ready to execute.

On the other hand, if the business being carved-out was previously acquired by the parent company it may be that very little systems integration ever took place. In that case the technology carve-out should be relatively straightforward as the buyer will already own its systems.

Know The Data

From the buyer’s point of view there needs to be a solid strategy, prior to deal completion, especially around system and data extraction. The seller should have worked out how it is going to separate one part of the business from the rest.

If all required data is held in systems that are shared with and owned by the parent company, then on Day 1 there’s little the buyer can do with the data until it’s removed from the parent systems. The buyer will not want to destabilize the business as soon as it becomes a legal entity in its own right so it will need to work out with the seller how the systems will continue to be operated, how long this will be for, and how much it will cost.

There are a number of additional questions around data. How embedded is the data of the carve-out company with the data of the parent company? What tools are needed to make the data compatible with the buyer’s system? How accurate is the data? Is there key data missing? You can’t compare apples and pears. As part of the transition you need to achieve a standard data model. This may take some time to achieve, you don’t want to risk getting it wrong or corrupting the data.

New considerations for data need to be taken in the post-GDPR/CPRA world. Special attention needs to be taken in a legal review for all data of the terms and conditions defining opt-in and acceptable use from both consumer and vendor (if purchased). Not having acceptable use confirmed absolutely can expose the buyer to significant risk.

Transition Services Agreement (TSA) – The Key to True Success

A TSA will spell out what technology services are being delivered by the parent company to the new company, for how long and at what cost.  It will also state who is managing the overall carve-out project. The technology Schedule for the TSA should be as detailed as possible even down to the application. For best results, it is best for the buyer’s technology due diligence advisor to work with the seller’s leadership to define requirements and timing, if at all possible. It is imperative to attempt to pre-negotiate extension periods and costs. These extensions are particularly important if the transition strategy includes new application development that will allow transition or transformation.

Silas Tate understand the risks of carve-outs and other M&A transactions and provides transaction assistance at levels of due diligence, transition services and enabling transformation 2023 Silas Tate. All rights reserved.