Navigating Mergers, Acquisitions, Carve-Outs, and Divestments

Will Nash and Chris Jones, Consultants in our Industrial Practice, recently hosted a webinar exploring the intricacies of mergers & acquisitions (M&A), carve-outs and divestments in light of the growing appetite for such commercial activities. They were joined by guest speaker, Fiona Kidd, a seasoned expert who has advised on over 100 transactions during the past 15 years, including significant carve-outs from RBS, Prudential, Old Mutual Group and Shell Group.

Below are the key insights from our webinar.

Conditions Warranting Expertise in Divestments

The discussion highlighted several core conditions that necessitate bringing in external expertise for divestments. These include the complexity of the carve-out, particularly when it is intertwined with transformation, limited experience or capacity within internal resources, time-critical delivery requirements and the desire to maximise value.

Collaboration with Business Leaders

Fiona’s approach to working with business leaders varies according to client requirements and complexity, generally focusing on three main areas:

• Operational: Ensuring the new business is fully operational and attractive to buyers, usually working with the COO and functional leads.
• Financial: Clarifying the cost structure of the new business to secure the best valuation, often in close collaboration with the CFO and finance team.
• Deal execution: Maximising deal value by aligning with buyer requirements, which can be complex in dual-track or auction scenarios.

Scope of Workstreams

Fiona's role can vary based on client needs and internal resource availability, and she often leads the entire program, taking responsibility for the full carve-out and divestment. She leverages the in-house team as much as possible, while scrutinising the approach to maximise value and meet potential bidders' requirements.

Collaboration with Third Parties

Collaboration with law firms, investment banks, and accounting advisers is crucial. While law firms and banks play a lesser role in the carve-out, they are heavily involved in the deal itself. Fiona acts as the central point of contact, coordinating all activities and stakeholders to ensure alignment and efficiency.

Managing Prospective Buyers

The approach to managing prospective buyers depends on the deal's nature and the number of buyers. In auction processes, it is necessary to define the process, communicate rules, and manage information flow through due diligence, and participate in negotiations if required, allowing the CFO to engage only at critical points.

Maximising Value Creation

To maximise value creation from a carve-out, Fiona focuses on ensuring the business has a fit-for-purpose cost structure, offering a well-priced Transitional Services Agreement (TSA), simplifying processes for buyers, and maintaining a controlled program for confidence and clarity.

Achieving True Value in the Current Market

It was emphasised that there is no one-size-fits-all approach. The strategy depends on the business opportunity, buyer motivations, and market conditions. Key pointers include providing quality information, addressing value-destroying issues before launch, maintaining competitive tension, and crafting a strong equity story for IPOs.

Key Advice for CEO and CFO Teams

Fiona recommends CEO and CFO teams to:

• Be clear on strategic aims for the divestment.
• Manage the energy of teams working on the deal.
• Establish clear carve-out principles.
• Ensure good communication internally and with advisers.

M&A Market Outlook

It is anticipated a rebound in M&A activity in the second half of the year, driven by stabilised interest rates and inflation, closing price differentials, and significant private equity activity. The focus will likely shift from financial engineering to the quality of business opportunities and management teams.