M&A Integration, Creating Value from a “Carve-in” Transaction
Anatomy of a lesser-known transaction type
Most people have heard of conventional M&A integration and Divestitures (be it carve-outs or spin-offs). However, the rare cases of carve-in transactions exist as well, albeit less prevalent than the former deal types. It does have its own triggers, rationale, transaction process, nuances and approach to integration which marginally differ from conventional M&A integration. Having had the good fortune of executing two of these during my career (both public companies), I thought I would share my thoughts on this topic.
So, what exactly is a carve-in?
A carve-in transaction refers to those deals when a parent wants to integrate or re-integrate a fully or partly owned subsidiary into itself driven by various triggers such as market pressures, a mega-transaction resulting to threaten the existence of the subsidiary due to conflicts resulting from the transactions, drastic changes in the channel structure or business model changes due to acquisition of a new technology which promises to extract higher value from the integrated operations than a standalone subsidiary.
Although several nuances of conventional M&A integration are still relevant, the focus with carve-in integrations are on a variety of different issues.
Here is a non-exhaustive list of some interesting differences:
Multiple Day Ones: Depending on whether the subsidiary is publicly traded or private, there tend to be multiple Day One scenarios
§ De-listing Day One: This is when the entity is taken off the stock market and privatized, a very elaborate procedure and steps need to be followed to get this accomplished.
§ Legal Day One: When they are still operationally separate, but all assets, personnel and contracts are operating under the parent legal entity structure
§ Operating Day One: Like integration Day One, the day when operational combination commences.
LEI (Legal entity integration): Underlying complexities of legal entities need to be integrated/simplified; each LE owns its headcount, assets, costs, contracts, liabilities and the absence of such a simplification can create operating challenges; careful analysis needs to be performed on optimizing legal entities for tax vs operating efficiencies vs triggering regulatory alarms. This can be a non-trivial process if there are multiple countries, currencies, and regulatory items to comply with
Change Control Mechanisms: If not carefully handled, carve-ins can trigger change control counter measures such as golden parachutes, poison pills and the likes. These aspects will need to be assessed upfront during the due diligence.
Dis-synergies: While integrations are thought of as synergy creating, carve-ins have the potential to create dis-synergies if not handled appropriately. Re-integration can line up an array of channel conflicts which were insulated in the prior operating structure (specifically if it was not a fully owned subsidiary), similarly there are other areas such as brand, products and specific customer contracts which can spin-up dis-synergies.
Synergies: Cost take out or even revenue synergies are typically not the primary drivers of these transactions, the focus is typically on Beta synergies i.e., those synergies directly impacting the stock price of the new company. The synergy exercise is very much focused on isolating, analyzing, executing, and communicating these Beta synergies to the capital markets.
As mentioned, this is a non-exhaustive list in the spirit of highlighting some of the differences. While I cannot reveal the specifics on the transactions I worked on, a hypothetical scenario would have been EMC carving in VMWare or HP carving in Mphasis — both those scenarios have now taken different turns but still work as a good possible example.