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In brief
Companies looking to unlock value amid economic uncertainty continue to consider divestitures, and particularly carve-outs, as a key lever. In fact, in the October 2023 EY CEO Outlook survey, more than half (58%) of US CEOs said that they are considering a carve-out, spin-off or initial public offering.
However, while the mere announcement of a divestiture often leads to an initial stock price increase, many of the businesses that they are divesting – whether they are acquired by another organization or stood up as a new company – fail to achieve their expected long-term value. One key reason: executives prioritize the mechanical separation of Day 1 and overlook the essential commercial strategy and execution needed for Day 2 and beyond.
To ignite sustained growth in both the divested business (DivestCo) and the legacy organization (RemainCo), CEOs and their teams need to make planning for Day 2 as urgent a focus as Day 1, bringing the commercial teams – sales, commercial excellence, strategy – on board as soon as the deal perimeter is defined. This is especially critical when DivestCo and, at times, RemainCo will be operating in a new commercial environment after Day 1, be it in a new sector, with new customers and competitors, or amid new market dynamics.
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Read moreA strategy focused on designing successful commercial organizations in their new operating environments is what positions both entities to seize new commercial opportunities while accelerating value creation, protecting revenue, minimizing margin leakage and reducing costs.
Typically, given the different financial profiles, RemainCo may focus more on cost enhancement, while the carve-out may focus more on growth. Executives planning the commercial strategies for both DivestCo and RemainCo should look to:
Different types of divestitures will have different needs. To unlock the full potential of a divestiture, whether it is a sale to private equity (PE) or a corporate (strategic) buyer, a joint venture (JV) or a spin-off, the new owner and RemainCo need to focus on commercial strategy early in the planning process by considering new market entry, channel expansion, pricing optimization and salesforce reorganization. Management considering a carve-out or other divestiture should also take these considerations into account in order to make an asset as attractive as possible to specific types of buyers or partners.
PE buyers generally have a holding period and exit plan in mind, leading to specific commercial strategy considerations when purchasing a carve-out entity. They also typically have an extensive network, resources and technology platforms that they can share across their portfolio companies to drive digital transformation, enhance product development and innovation potential, or improve internal processes. While PEs may operate the carve-out as a stand-alone, they may have unique perspectives within the commercial functions, such as order-to-cash, application development or even digital customer service capabilities, based on their experience with other portfolio companies.
Pre-Day 1, some collaboration between the seller and the PE buyer is needed to establish a leaner, stand-alone commercial organization for the carve-out.
Commercial strategy initiatives, such as channel, customer and product vertical expansions, are critical to achieve the deal thesis.
Buyers may need to decide whether certain areas of the commercial organization, such as marketing, sales, customer service and order-to-cash, can be immediately integrated to garner efficiencies of scale or left separate for a time to avoid customer-relationship disruptions.
The deal thesis is likely to include the potential to grow both the current and acquired businesses through expansion into each other’s markets and establishing cross-selling operations. New product development can be boosted by combining research and development efforts; sharing intellectual properties; or aligning marketing and sales initiatives, talent and expertise.
Economies of scale can provide cost synergies and consolidation of operations to further streamline operations and eliminate redundancies by integrating the acquired business unit into the buyer’s existing structure.
Companies may participate in joint ventures to access scale, new markets or unique technology or to share risks. Considering the ownership structure and synergy implications of a JV model, both seller and buyer organizations will be focused on the long-term trajectory and success.
The buyer likely identified certain commercial and product development needs that are more challenging or will require more time and effort. In a JV model, both companies can enjoy better sales and distribution, larger market and customer base, lower cost via economies of scale and potentially reduced competition, essentially reaping the best of both worlds.
As the seller enters into the JV agreement, it will need to evaluate the operating model of the business and level of entanglement with the rest of the organization.
Both DivestCo and RemainCo need to operate as stand-alone companies, though the two companies will likely share some common customers. Streamlining handoffs between DivestCo’s and RemainCo’s account teams is vital to minimize customer disruption. Key customer and supplier relationships need to be assessed, especially as some will still be served by or support both entities.
The commercial strategy leaders at each organization need to clearly define and articulate any new business focus and strategy as they will likely operate in different sectors with new competitors, customers, value drivers, scale, market dynamics and multipliers. Talent decisions may need to be carefully thought through as employees are allocated between the two entities; talent flight is a key concern. Enhancing the sales force and aligning key sales KPIs will support their new operating environments.
Focusing on Day 2 and beyond does not mean moving Day 1 planning to the background. Efficient and timely mechanical separation lays the foundation for long-term success. Commercial strategy should play a key role here as well, with a focus on three areas:
Divestitures are an ideal time for businesses to fundamentally reimagine and transform their operations. While transaction execution is a busy time for business leaders, it is imperative to incorporate commercial strategy into the divestiture plan to set up the businesses for long-term success – whether that is quickly returning value to shareholders, building out new capabilities or competing more effectively in the marketplace. EY-Parthenon teams have extensive experience in helping companies plan and craft the commercial strategy for Day 2 and beyond.
Divestitures are a tactic that many companies are using to unlock value in existing assets and fund new investments. However, many companies leave value on the table by not focusing on the customer strategy for both the divested business and the legacy organization. What steps do companies need to take to make planning for the Day 2 customer experience as important as the separation plan itself?
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