Carve-out projects: The devil is in the detail

Categories: transactionsPublished On: 24.08.2018

Carve-out projects at large-scale corporations are complex undertakings. To avoid expensive mistakes it is absolutely essential that the entire process is carefully planned and implemented.

Listed companies are under constant pressure to perform well, especially the German blue chips in the DAX. A lack of positive development is perceived to be a setback and shareholders will only hold on to their stock or top up their investment if the management can credibly communicate the company’s dynamic growth and sparkling profits in every quarterly report.

High investor expectations are partially responsible for the fundamental structural changes that are taking place in the German corporate sector. In the past, diversified industrial corporations were a particularly attractive investment because their activities – and thus the risks – were distributed across various sectors. Today, investors are more interested in companies that focus on the lucrative sectors. As a result, many DAX-listed companies face similar major challenges. Business units that aren’t generating enough profits or are a bad fit for the portfolio might be better off with another owner, so they are being split off and floated on the stock exchange as independent entities, or divested to former rivals or, at least, internally restructured.

Three such spin-offs are currently hogging the headlines in Germany. The first two are the public listings of Siemens’ Healthineers diagnostics division and Deutsche Bank’s DWS asset management unit, which are likely to be the two biggest German IPOs of the year in terms of financial volume. The third headliner – although or because it still hasn’t taken place – is the plans of two local energy industry heavyweights to restructure the energy market. German energy giant RWE plans to sell its 76.8 percent stake in its innogy subsidiary – which only went public in 2016 – to E.ON. The deal will involve RWE transferring the retail, energy networks and customer solutions business that is bundled in innogy to E.ON, whereas E.ON will transfer its renewables business to RWE.

Many stumbling blocks

The media coverage of these three events focuses on the economic logic and the associated hopes for the parents‘ and subsidiaries‘ future business developments, while largely ignoring the impacts of the operative implementation of the restructuring activities, the associated risks and the potential stumbling blocks. As always, the devil’s in the detail. “Such far-reaching organizational changes are the ultimate challenge for the affected organizations, especially in the transformation phase,” commented Andreas Florissen, managing partner of management consultancy firm acondas. “The project has to be broken down into workable sub-projects and very carefully managed, otherwise there are likely to be some nasty surprises and problems along the way,” added Jörg Fengler acondas’ other managing partner.

The acondas consultants are organizational development and transformation process specialists with many years of experience supporting very different carve-out projects at major corporations. “Based on our experience we’ve identified five success factors that are important when you’re setting up and implementing carve-out projects,” said Fengler. “First of all you have to define the objective because the project deliverable can vary considerably depending on the method you choose to divest a division or business unit.” Siemens’ objective with Healthineers is for the business unit to go public as a separate entity, so its implementation strategy will be very different to that of RWE for its divestiture of innogy to E.ON.

The project plan will also differ depending on whether you’re selling to a strategic investor – as in the case of E.ON’s acquisition of a majority stake in innogy – or to a financial investor as with the sale of conglomerate General Electric’s distributed power business unit to U.S. buyout group Advent this June. “Additional complexity drivers come into play when internal restructuring projects involve the merger of business units or the incorporation of split off divisions in newly established joint ventures, as was recently the case with Thyssenkrupp and Tata’s steel divisions,“ said Florissen. “The desired level of independence and the integration concept determine the focus of the carve-out project.”

Critical interfaces

In the next step the entire project is divided up into functional sub-projects. “That reduces complexity and makes the project more manageable as a whole. It also ensures that every single aspect is covered and nothing gets forgotten,” said both acondas managing partners in agreement. A typical functional breakdown would include the sub-projects of “legal and taxes”, “commercial issues” with external financial/management accounting and finances, “IT” and “organization and personnel”. However, as already mentioned, when you break down a project like this, the devil is always in the detail. “Each sub-project has critical interfaces with other sub-projects, and they have to be taken into account in the overall project schedule,” said Florissen.

At the same time, you have to consider the impacts of a carve-out for the workforce and external partners. A company’s decision to part ways with a business unit or division is often associated with job losses or, at least, structural changes at the workplace. In Germany, where co-determination is a legally enshrined right, there are negotiations with the works council to conduct and redundancy plans to draft. Contractual obligations to customers, suppliers and external service providers and the former business unit’s inclusion in complex international supply chains are all associated with potential stumbling blocks that can complicate conversion projects. “The fact that there are so many issues to resolve means it is essential to involve both internal and external experts at an early stage in the process,” recommended acondas managing partner Fengler.

Those experts can also help in the third step of the process: the management of the project. “We strongly recommend the establishment of a team to handle all aspects of project planning and coordination,” advised Florissen. “This team performs a steering function and collaborates directly with the project manager. Although it isn’t involved in the actual implementation of the sub-projects, it needs to know exactly what’s going on and when so it can identify risks and promptly intervene when there is need for coordination or an issue is getting out of hand.“

External assistance according to the toolbox principle

A structured and transparent approach is essential because of the multitude of tasks to be performed, the high level of complexity and the number of departments and units involved. It’s also key to securing the support of everyone involved and prevents people from feeling left out because they don’t feel adequately informed about the next steps. “In our experience, proven project management tools are a great help in situations that aren’t always easy for the people involved,” said Fengler. The acondas consultants have an entire toolkit at their disposal, including an integrated project plan as a blueprint for the entire project as well as defined change request processes to ensure that any changes to project objectives can be implemented within a realistic timeframe. A decision logbook has also proven to be very useful because it effectively documents all the project decisions and next steps for the entire project team.

When carve-out projects run into difficulties the problem can generally be attributed to not enough importance being attached to the fourth step in the overall agenda: change management and the communication of change processes to all people affected. When rumors of a change are heard through the company grapevine the workforce gets concerned. “There’s absolutely no point in playing it down or denying it,” said Florissen. “The best way to defuse the situation is to be absolutely honest and provide comprehensive information about the change.”

Decision processes shouldn’t just involve the workforce and the employee representatives, but also the management. They play an instrumental role in the creation of new structures and they should be aware of why those new structures are being created so that they can explain the consequences and ensure that everyone accepts them – employees in their areas of responsibility, customers and suppliers, authorities and politicians and, last but not least, the general public. The general public should never be underestimated in its capacity of consumer, particularly in the age of the internet and social networks. Poor communication can soon lead to a company becoming the target of a boycott or a storm of protest.

Smooth operations

When the first four steps have been completed, the fifth and last step involves ensuring the smooth running of operations in the new structure. “The project hasn’t successfully closed out until the change has been legally implemented and business operations are back to normal,” said Fengler. The transition to normal business operations doesn’t just involve the successful transfer of licenses, patents and production equipment, and the restructuring of goods flows, supply chains and distribution channels. “Lower priority issues also have to be taken care of,” added Florissen. These include setting up communication channels and the corporate intranet, and drafting a new corporate governance policy to clarify signatory powers.

Last, but not least, there are all the details to take care of such as the issue of new employee ID cards and IT system access permissions. Failure to focus on the details can mean that all the meticulous planning has gone to waste because key personnel can’t access their workplace or get any work done.

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Picture source cover photo: Professor25 –

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