Delivering Carveout TSA Exit in Mid-Market PE PortCos:
Often in mid-market PE backed PortCos, carveout and PMI needs to be executed at a faster pace compared to a larger organisation. Carveout SMO is typically led by a program director/manager end to end looking across all the workstreams The intention is to setup NewCo as a standalone entity at the earliest possible, without compromising on the operational and business disruption.
Challenges in mid-market carveouts:
- ParentCo and NewCo management have limited expertise and experience of managing carveouts with precision, quality, protecting the NewCo business, managing time efficiently of ParentCo leadership and the functional leads
- Limited resources and expertise are available in-house to complete the carve out
- Without carveout knowledge, it becomes difficult to manage separation at pace, thereby losing money by the day
- Key decision makers on the NewCo are largely unavailable due to management change, and key functions and roles not being transferred by the ParentCo - often leading NewCo setting up these functions from scratch
- If the TSA exit timeline overruns, it leads to additional TSA fee spend by the NewCo, additional burden on the ParentCo to continue providing the TSA services, further negotiations between ParentCo and NewCo on TSA extensions worsening their already strained relationship, and additional one-off project costs for the overrun
CIDEK's Carveout Approach:
Having delivered 50+ pre & post operational carveouts, CIDEK understands these challenges to deliver carveouts for mid-market PE PortCos, and how to successfully navigate through the carveout TSA exit phases.
1. Clear activity definition and ownership across the carveout lifecycle phases
CIDEK has worked across the pre & post deal lifecycle phases, and hence understand the complexities, challenges and time it should take to complete each of these phases
2. Carveout scope - identifying carveout entanglements across key parameters
While finalising the transaction perimeter and carveout scope, CIDEK quickly analyses the carveout entanglements between ParentCo and NewCo across People, Process, Asset/IP/Brands, Contracts and Technology. These entanglements are identified through documentation and interviews with ParentCo and NewCo team. CIDEK specializes in building the entanglement scope with precision and pace, many a times, connecting the dots due to limited documentation and management availability during the initial deal lifecycle phases
3. SMO team mobilisation
Between Sign to Close, SMO team and workstreams are established and teams are mobilised for TSA exit execution.
CIDEK recommends a lean SMO structure, with carveout TSA exit execution control lying with CIDEK SMO team. This ensures clarity in the overall carveout execution across the workstreams. Often at times, CIDEK has played the joint role of ParentCo and NewCo SMO, thereby ensuring greater control and co-ordination between ParentCo and NewCo.
During the scoping phase, CIDEK identifies the workstream leads from ParentCo and NewCo. If there is any capability gap and expertise missing, CIDEK either assumes the workstream lead as an additional responsibility, or brings the expertise from CIDEK's wider associate/contractor network.
CIDEK recommends accelerating TSA exit carveout working with known 3rd party vendors for various system and services migration. Vendor selection through an RFP is recommended only if absolutely necessary, as it may elongate the process by at least 3 - 4 months.
CIDEK provides advisory to NewCo leadership, or assumes any functional lead roles for critical decision making needed to accelerate carveout TSA exit, overcoming the challenges of missing NewCo leadership.
CIDEK's Sample Carveout Credentials:
CIDEK led the carveout SMO for a US EdTech company from a US headquartered Cloud Computing company, with TSA exit planned for 6 months. With CIDEK's recommended approach above, TSA exit was achieved in 4 month's time, thereby saving 2 months of TSA cost and one-off project costs. Furthermore, CIDEK supported the restructuring of the NewCo whilst the TSA exit was in process. This included sizeable headcount reduction, and rationalization of system and vendor landscape across services and workstreams. Overall systems were reduced from 150 to 70, vendors reduced from 20+ to 5, with overall cost savings of around $5mn yearly.
CIDEK is available to support and keen to discuss any carveout programs for PE investors and PE backed PortCos.