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Winning carve-outs

How carve-out due diligence transforms investing

Carve-outs present private equity (PE) investors with significant upside for superior returns; they also pose specific risks and challenges. But with the right mindset and expertise, carve-outs can help make your bold merger, acquisition, and restructuring aspirations a reality.

Carve-out opportunities

Carve-outs are an integral feature of the merger and acquisition (M&A) and restructuring landscape. The impetus for businesses of varying scale to evaluate their portfolio and divest non-core assets presents significant opportunity for both strategic and financial buyers. Carve-out deals typically present the potential for superior returns. Specifically, PE investors have access to assets that have not received adequate attention or capital infusion as part of a more diversified organization; this presents attractive opportunities for transformative top-line growth and margin improvements.

Inherent to carve-out transactions, however, is a greater degree of complexity and uncertainty. Buyers need a defined strategy and well-developed approach to capitalize on and maximize the opportunities carve-outs present. This means that carve-out due diligence should become a key part of the process.

Learn more about the path to success on carve-outs

A clearer path to carve-out success

Look internally

A PE bidder can gain advantage by pursuing a carved-out business that fits into a portfolio company. When the acquired assets can fit in neatly, the PE investors can mimic the privileges of being a strategic buyer without losing any control or compromising on deal vision. The traditional cost benefits of integrating businesses can be realized, along with potential revenue synergies.

Structure creatively

The most innovative option for private equity investors is to partner with a strategic buyer. This recognizes that strategic acquirers have natural advantages on carve-out deals. Typically, in this deal structure, the strategic buyer would tuck in the jointly acquired asset with their existing business and leverage their infrastructure to disentangle the carved-out business from its former owner. In addition to deal optimization efforts, the partnership could also create value through operational and top-line synergies.

Move quickly

Moving through the process with urgency during the deal evaluation stage can improve the odds of success for PE buyers. It can boost their chances of being viewed as a preferred buyer. In fact, certain PE firms actively look at faster dealmaking as a focused strategy to differentiate from strategic buyers. However, even with the faster decision-making, it’s important to be mindful of carve-outs in delayed markets.



Drive exclusivity

Pursuing greater exclusivity during the bidding process can generate advantages for PE buyers. Being nimble in decision-making is just one way this can be done. PE firms can also successfully differentiate themselves by taking a view of carve-out deals that goes beyond any individual transaction. Engaging longer-term with Fortune 500 companies that are serial sellers can boost the credibility of a PE firm, making them more likely to be viewed as a friendly buyer.

Disentangle quickly

The ability to stand up a business in an accelerated fashion may be a critical factor to win the bidding for a carved-out business. Limiting the ask for transition service agreements (TSAs) can be attractive to sellers that are, after all, trying to turn their resources and management attention elsewhere. PE buyers can bolster their execution capabilities through a range of creative approaches that help limit the dependence on TSAs while also reducing redundant costs.



Moving forward

Carve-outs can have their own complexities. Fortunately, those challenges aren’t a mystery, and neither are the avenues for huge opportunities. By pacing themselves and thinking creatively, PE buyers can carve out room for their bold aspirations.

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