How buyers can successfully navigate integrating a carve-out

It’s hard enough to successfully integrate organizations after an M&A. For organizations on the buy-side of a carve-out, the deal comes with added complication: integrating new assets while also managing engaged sellers’ often-opposing interests (see sidebar, “What exactly does ‘buy-side carve-out’ mean?”). Day one and business continuity risks are high in these deals, making it crucial to work out a profusion of planning and resourcing details.

McKinsey’s proprietary research shows that buy-side carve-outs account for 28 percent of all M&A transactions.¹Analysis considers all transactions above $100 million made between 2018 and 2023, excluding acquisitions of minority stakes (meaning that there was no change in control) and physical assets (meaning that the target company didn’t involve common stock or the target was a physical asset, such as a cellphone tower or a piece of real estate). The high level of interest in these targets is understandable: Sellers often shed noncore, deprioritized assets to buyers that are generally better positioned, with better strategic fit, to reap value from these assets.

Integration leaders play a crucial role in buy-side carve-outs. They can come from numerous backgrounds, including business unit and technology roles. Whatever these leaders’ experience, their priorities in integrations are the same: to forge a positive relationship between the buyer’s and seller’s teams, scope and provide resources for work streams, and prepare for day one and postclose integration.

Why carve-outs are more complicated on the buyer’s side than the average acquisition is

It’s often said that three is a crowd, and integration leaders would likely agree. In a regular M&A transaction, an integration management office (IMO) collaborates with a target management team to make all integration-related decisions. The two parties are aligned on the single objective of making the integration a success. In a buy-side carve-out, however, the buyer’s IMO needs to collaborate with the seller’s separation management office (SMO), whose objective is to accelerate the separation so that it can focus on its core business. A seller may try to dispose of low-performing or noncore talent and noncore assets or technology. It may feel that it doesn’t need to go the extra mile to support integration-planning activities or share much data prior to deal close.

There’s also business continuity risk from critical cut overs, such as contracts being reassigned or split, people being transferred, processes being rerouted, and systems being separated or cloned on or right before day one. For example, when an acquirer forgot to update its insurance policy following a deal close, the target’s sales force members could no longer drive their cars to customer meetings. In these deals, any mistake—even a seemingly small one—can create disruptions that lead to frustrated employees, irritated customers, or regulatory penalties, among other consequences that aren’t so easily overturned.

Finally, there are often more areas of work requiring planning and resourcing compared with a typical integration. Examples include planning and negotiating for transition service agreements (TSAs), transferring data among the three parties, tracking and managing last-minute deal perimeter changes, and needing to approach a deal’s close in different ways in different markets.

Priorities for capturing a deal’s full potential

Integration leaders in buy-side organizations play a central role in overcoming numerous challenges inherent to these transactions—and three in particular.

Structuring IMO and integration teams

Integration leaders can begin by fostering alignment between the buyer’s and seller’s teams:

• Establish a healthy and collaborative working relationship with the SMO. Having a good working relationship with the SMO is both the primary challenge and main value driver of a successful integration. Best practice is to develop joint planning principles and guardrails directly in the purchase agreement, prior to deal signing. From that point, the IMO and SMO can align on roles, responsibilities, and a collaboration model for the pre-deal-close-planning phase. For example, a pharmaceutical company and SMO established a close collaboration model, including shared locations, daily touchpoints, and full-day workshops. All parties involved took the time to carefully detail how the TSA would play out, provide input to decisions, deliver cross-organizational training, and build plan Bs to avoid any business disruption.
• Build a joint plan of milestones with the SMO. Trying to manage plans in isolation is fraught with risk. The IMO can partner with the SMO to define a single source of truth with critical milestones for both sides, including key deliverables and joint planning workshops.
• Define which teams require a three-in-a-box setup. Certain functional areas, especially those that have many entanglements, need to include a seller representative as a colead or input provider. Having three-in-a-box teams—composed of buyer, seller, and target representatives—that collaborate openly can facilitate alignment ahead of day one.

Scoping and providing resources for work streams

Integration leaders should focus on actions that reflect the deal’s structure and strategy:

• Identify the need for dedicated resources. Analyzing deal requirements and strategy indicates what additional resources or teams should be in place. For example, the buyer may need someone in charge of tracking changes to the deal perimeter, someone as the point person with the seller on all TSA matters, and someone orchestrating data and system disposition across teams or working closely with the deal team to translate the implications of closing scenarios into integration plans. Managing the deal perimeter tends to be critical, especially when there are resources within the assets being carved out that are shared across other business units of a seller. Which and how many of these resources should be part of the deal perimeter? Someone in the IMO can be tasked with keeping track and working with business leaders to define who should and shouldn’t be transferred.
• Understand brand and use-of-name restrictions and implications. If rebranding is a requirement for day one, it makes sense to approach it as a cross-functional effort coordinated by the IMO. For example, one acquirer forgot to stockpile product before the deal closed and ran out of stock while the regulatory team was still waiting to obtain a license to manufacture under the new entity. This led to disruption in order fulfillment and avoidable revenue loss. The checklist is extensive and includes digital platforms, physical signage, and products. Some elements may depend on legal-entity changes (such as invoices), and many will have IT dependencies (such as the use of an email domain). When it comes to physical labels, for example, if the seller requires immediate cessation of name use, the buyer and seller may need to start the relabeling-manufacturing process even before deal close.

Creating day one readiness and preparing for post-deal-close integration

Finally, integrations leaders will need to prepare for day one readiness and post-deal-close integration:

• Determine prioritization. Unlike more straightforward integrations, buy-side carve-outs demand extra focus on identifying entanglements and day one separations and cut overs. In these situations, the final design of the organization and other complex initiatives may need to be temporarily deprioritized, depending on the team’s capacity.
• Run a joint day-one-readiness workshop. As a deal’s close approaches, it’s beneficial to run a day-one-readiness workshop with all parties. This group can focus on a detailed sequencing of activities that will take place before, during, and after the deal’s close. Exploring what-if scenarios in a cross-functional group setting is helpful to align responsibilities for each required step and ensure that all needs are covered and risks mitigated.
• Prepare for the unexpected. The complexity of a target’s simultaneous separation and integration may lead to unforeseen issues, regardless of preparation. Setting up a robust day one hypercare effort with rapid escalation processes can be critical to minimizing disruptions.

Despite the additional challenges associated with integrating carve-outs, integration leaders on a buyer’s side can view overcoming the hurdles as an opportunity to further build their M&A and integration capabilities. This valuable experience can only make an organization—and its leaders—stronger and more prepared for the next wave of deals.