In our recent ‘Uncomplicating Carve Outs’ webinar we outlined the key steps and approaches needed to get to Day 1 and beyond with proper preparation and emphasizing speed over elegance. With carve outs likely to be a dominant feature of the 2021 M&A landscape and, in all likelihood, for some years to come, how should buyers approach value creation and when should they start implementing their plan?
The reality is that the Value Creation Plan starts from the outset. As carve-out assets have typically been neglected, or de-prioritised, (or, in the case of the last 12 months, heavily affected by the disruption of the pandemic) they are particularly attractive to PE firms. They lend themselves to significant performance improvement opportunities, either as stand-alone businesses (possibly as a buy-and-build platform) or as integration targets with an existing portfolio companies. As such, the plan to realise value from the asset forms a key part of the buy-side investment thesis, and is usually split into two distinct phases – Pre-Deal DD and Post-Deal.
“Pre-Deal DD” - The challenge in the Pre-Deal DD phase is the inherent limited access to management and data. Having deep business/sector/functional expertise, combined with a proven track record of performance improvement delivery, is vital to develop a set of initiatives (through a combination experience-based hypotheses and data analysis). The due diligence phase is primarily used to stress test/refine the initiatives, reflecting not only a refined set of prioritised initiatives but also the risks/issues associated with them that all need to be bottomed out post-deal.
“Post-Deal” 100-Day Plan – It’s only after the deal completes that greater management and data access is available and the picture becomes clearer. Initial Pre-Deal DD initiatives can be validated and detailed (and unfortunately in some cases, where haste or lack of preparation has prevailed, disproved). In addition, new initiatives can also be developed based on a clearer understanding of the true ‘health’ of the asset. These will form the Post Deal Value Creation Plan which should prioritise and focus the initiatives. Here the application of the 80/20 rule is vital focusing attention on the initiatives that deliver most of the value. The initiatives should be actionable, measurable, and pragmatic and have a relentless drive and focus on Cash / EBITDA generation. To deliver the value, it is fundamental to address the key drivers that have the greatest impact on the business first.
However, having the right Value Creation Plan alone is not enough. A strong governance model to drive the implementation is equally important. The Challenge PMO should not be a check-list PMO. Carve outs are complex and challenging transactions and The Challenge PMO needs to be led by strong operations professionals who have a deep and proven track record in delivery. It should also be content rich and solution driven rather than a reporting and escalation mechanism, as time frames are challenging and delays can cost a lot of money.
Combining these elements into a single clear plan, formulated at the beginning of the process, reconfigured as new, better information becomes available and delivered by an experienced, ‘battle-tested’ project team are critical in unlocking the most value, most quickly.