Carve-outs are among top managers’ favorites, because they have all kinds of potential. In the 2019 study "The carve-out challenge: A roadmap for success," consultants from Roland Berger explain what carve-out management is all about, and suggest four key strategic questions that each manager should ask him or herself to succeed.

A carve-out is the separation of one part of a business from the remaining operations. This part may be a business unit, it may be a portfolio of assets or even just a single asset. Furthermore, three types of carve-outs can be distinguished: corporate equity carve-outs, which represent the sale of a part of a company through an IPO, corporate spin-offs, where the initial shareholders are allocated shares in the subsidiary free of charge, and sales, where the unit is sold in bilateral transactions to strategic or financial buyers. Objectives clearly differ from case to case and the distinguishing features are complex. We suggest four key questions that managers should ask themselves when assessing the necessity and feasibility of carve-out options, before making their decision.

Question 1: What are the objectives of the carve-out?

There are various reasons to opt for a carve-out. While many listed companies choose to set up a holding structure through corporate carve-out, performance implications are also often a reason to take this measure. Each objective requires a different approach and emphasis for the carve-out. It is therefore paramount for top management to clarify the specific objective of the envisaged carve-out.

Question 2: What is the perimeter of the unit to be carved out?

Perimeter questions need to be answered in light of the carve-out objectives. Which products should be included and which functions? What is the geographical footprint of the NewCo, and the level of vertical integration? Once the objective of the carve-out is clear, top management needs to set the perimeter of the business unit to be carved out. One key challenge is the ability to balance the interests of the NewCo and the RemainCo. Considerations that arise are the questions regarding how to slice the value chain between the RemainCo and the NewCo, including R&D, purchasing, operations, sales & distribution, and overhead functions such as IT, HR and finance. In the transition phase of 12 to 18 months after a carve-out, TSA solutions can help.

Question 3: Who are the potential buyers, and how should the NewCo be sculpted accordingly?

The next question that should be addressed is the definition of a buyer universe, ranging from financial investors like private equity firms to strategic investors in the same sector. While from an employee perspective financial investors are excluded, according to the study no time should be wasted illuminating and aligning a carve-out in this regard. On the other hand, if private equity investors are an option, this is also a valuable piece of information, as for example a stand-alone capability can be more relevant here. In addition, a distinction can be made between a carve-out to a strategic investor and a carve-out to the free market (IPO). Closely linked to the buyer universe is also the question of the functional scope of the NewCo, and its operating model.

Question 4: Which approach to choose?

Once the direction of the carve-out has been defined, management should select an approach that achieves the carve-out objective and is suitable for the directive of the carve-out. The trade-off triangle shows how the different objectives impact the approach to the carve-out. It shows the relationship between speed of execution, quality of the established NewCo and RemainCo, and value, which includes a valuation of the NewCo and the RemainCo, and one-off costs from execution. Trade-offs have to be made between the three.

Preparing the carve-out execution

Once the decision for a carve-out has been made and the objectives, perimeter, potential buyers and approach are defined, the preparation of the carve-out begins. A carve-out can be a long journey that needs to be well planned and professionally managed. What this means for management, and how the measure can lead to success, is explained in the study "The carve-out challenge: A roadmap for success," by Roland Berger.