Carve-out transactions

COVID-19, ESG goals and supply chain crisis likely to further boost carve-out deals

Even before the Corona crisis, carve-out transactions enjoyed great popularity and had become for private equity funds and corporations one of the most important means to create values for their stakeholders. The COVID-19 pandemic, environmental, social and corporate governance (ESG) goals as well as the worldwide supply chain crisis have further boosted this development and forced companies to put their existing business strategies on scrutiny. We expect this trend to continue and even intensify in 2022.

What are carve-outs?

From a pure technical point of view, carve-outs mean the separation of business units, subsidiaries and/or business lines from a larger company or companies. They usually are launched ahead of, or in parallel with, divestitures. The carve-out unit may be divested either directly to financial and/or strategic investors via a trade sale or indirectly to various investors via an IPO. In some cases, corporates may also decide to create value by transferring the carve-out unit to existing shareholders of the company.

Typical reasons for carve-outs

The reasons for carve-outs can be quite different: Some companies want to refocus on their core business, while others want to divest business units that are falling short of their economic expectations or no longer fit the business strategy. Often, however, it is also a matter of fresh capital needed to foster the growth of strategic areas, to improve the financial situation and/or to drive the (digital) transformation of their operations and businesses.

ESG goals as new driving force

More recently, also ESG goals have been driving private equity funds and corporations to transform their business strategies and divest businesses that do no longer comply with their sustainability values.

The more integrated, the more complex

Whatever the reasons are, carve-out deals can be extremely complex. It is fair to say that the more integrated the carve-out unit is with the rest of the company, the more complex the separation process. Often, organisational, legal, tax, accounting, technical and financial issues need to be addressed simultaneously, and often across different business functions, countries and cultures. The result can be a flurry of micro-milestones and metrics that must be considered and coordinated during a process that typically spans six to twelve months (and sometimes even longer).

Legal issues impacting value creation

A fundamental prerequisite for a successful carve-out deal is therefore good and early preparation and planning that also adequately covers the main legal issues, which may have a significant impact on time and costs and thus on value creation.

Conclusion

For the success of carve-out deals, it is thus also of crucial importance to identify the legal implications of the contemplated carve-out at an early stage. This enables private equity funds and corporations to identify potential pitfalls and material issues at an early stage and, if necessary, to take appropriate countermeasures in order to implement the carve-out without major surprises within a realistic timeline and at reasonable cost.