307. Making buy-side carve-outs work for everyone

For me, in a buy side carve out, one thing really stands out, which is employees may not have signed up to work for that organization that's acquiring. It's really important for the buyer to think about how do we immediately win the hearts and minds of those employees. If you start to lose the hearts and minds, your value is going to literally be walking out the door. From McKinsey and Company, I'm Sean Brown and welcome to Inside the Strategy Room. That was Cameron Cordestani describing just one of the challenges involved in creating value from buy side carve outs. Today we're joined by Cam along with Anna Mathson and Rui Silva to discuss how leaders can ensure a smooth transition during this kind of transaction. We'll unpack the unique challenges of acquiring and integrating current carved out assets and explore practical insights and real world examples to show how these challenges can be overcome, ensuring that these deals create value for everyone involved. Our discussion today is based on their McKinsey.com article titled how buyers can successfully navigate integrating their carve out, which we've linked to in the show notes. And now I'd like to introduce our guests. Cam is a senior partner in our New York office and the leader of our North America merger management practice. Cam, welcome to the podcast. Thanks so much Sean. Great to be here. And Anna Mattson is a partner in our Zurich office and global co leader of our separations and spinoff practice. Anna, welcome. Thank you very much Sean. Excited to be here. And Rui Silva is a partner in our New York office and the global co leader of our M and A integrations practice. Rui, thanks for joining. Thank you Sean. Awesome. Really excited to sit down with the three of you today. Cam. I thought maybe to set the stage for talking about buy side carve outs, you could briefly tell us about an interesting transaction that you've worked on that involved the buy side carve out. Yes, thanks Sean. You know, I was, I was reflecting on this recently and one of the ones that really stands out to me is a situation where we, I was supporting a client that had less than 45 days to integrate a fully standalone pharmaceutical business unit. This was a major industry shaping combination across two large pharmaceutical players and in the final stretch of their regulatory approval process, there was a government mandated divestiture of one of their lines of business. And so with those 45 days to go, starting with the trend that the TSAs or transition service agreements, all of these things needed to be negotiated and ironed out in that very, very short period, ultimately leading to tremendous success. But you can imagine those 45 days were quite a challenge as we moved through the entire process in terms of making the successful offer and then moving through the planning process to prepare for ultimate close. But really stands out and was a great learning experience in terms of how to move through a buy side carve out quite quickly. And so how common are these kinds of integrations? You know, before we got into this research, we thought of them as a little bit more of as an exotic animal, something you'd see rarely, maybe something that would happen every now and again. But as we dug into the actual market activity in any given year, it's up to 15% of the combinations and acquisitions could be characterized as a buy side carve out. And this includes both entire units like I just described, moving from the seller to the buyer organization, or perhaps disparate units, maybe bits and pieces across an organization due to a portfolio divestiture or a shift in strategy that move from the seller to the buyer organization. And I imagine that these combinations would raise a different set of questions or challenges in addition to the traditional challenges one might see in a more standard integration or acquisition. And where in particular do you see these challenges occurring? There are additional complexities tied to the operating model and what a buyer might do with the assets that they're acquiring, especially if they're buying disparate. Those disparate assets, you have more parties involved. In the situation I described a moment ago, you had essentially three organizations in addition to the entity and the part of the organization that was being shifted. You have new risk due to the business continuity challenges that come along with system cutovers, process cutovers, people changes. There's the human element here as well. People are dealing with a tremendous amount of change as they think about moving from one organization to the other. The tsas or transition service agreements, as I mentioned, and ensuring that both an organization is ready to sever those ties as well as accept and catch those new responsibilities, become quite important. Value creation, always a theme in an integrator, and acquisition, can also be more challenging due to lack of information or due to the need to prepare for the separation and protect the business continuity during this interim period. There are additional costs due to the transition service agreements and perhaps duplication of capacity that might need to exist for some period of time. So dis synergies also come to mind. And then finally, as I mentioned, there's a human element of this, especially as you're moving potentially large groups of employees who may not have signed up to be a part of that new organization that's making the acquisition so there's an increased risk of attrition and additional cultural risks above and beyond the standard that you'd see during an acquisition or an integration. Thanks Kim. That makes sense. And are are there other aspects of traditional M and A that are even more critical for people to focus on before they embark on a buy side carve out? The business continuity is an area that we encourage rigorous focus in any combination and in any M and A activity. And it becomes that much more critical as you think about a buy side carbo. How you rapidly get your arms around and gain fluency and what's happening across the customer facing activities is critical. And for the customer facing employee set, it's important that there's rapidly the opportunity to move towards shared systems. The access that you have as the buyer or potentially as the seller to information on reporting becomes also extremely important. And during diligence a potential buyer needs to be thinking about their own access to the reporting and business performance across a range of key performance indicators and metrics that will be critical to monitor through the pre close period and then immediately post close. This sense of the customer interaction, who owns the customer? How are we interacting with the customer? How do we take action based on customer requests? All of these things also very important, especially if there's a different model for how the acquired asset or the buy side carve out will operate in the new the new entity, all the commercial questions and the commercial strategy. How independent might this unit be? Back in my example, in the pharmaceutical example, the product that the company was acquiring was very different than any that it had acquired in the past. And so it needed to think differently about building the strategy and supporting the strategy. Ultimately it fit into a bigger platform and bigger opportunity. But initially there was independence in the strategy and the shaping of the commercial direction and trajectory of that asset. I mentioned earlier the importance of people and the human capital aspect that is critical to consider. How will you retain and excite and engage what capabilities might need to be reinforced or built? And this goes not just for those individuals that are joining your organization, but also your own organization in terms of how they work with this new entity. How do you rapidly then also create a network for the operations of the acquired entity? How can it be successful in an operating model in which it's being extracted and then rapidly grafted? There are additional considerations as it relates to the supplier relationships. In some cases the supplier partners and other external partners may be different as you go through this exercise. And so it's important to Think about maintaining the supplier continuity and then ultimately bringing and thinking about how these might come together in a post close environment. And finally there's the question of branding identity. And I'd call out that it's also important factors to consider from an internal and employee branding perspective. How employees perceive the brand of the newly acquired company, what it means to them, helping them understand what may or may not be changing, all become very important to think about as you're going through the due diligence process and really need to stand out as distinct elements for how you bring these organizations together. Okay, that gives us a good sense of some of the complexity involved here. It seems like a pretty comprehensive list, but Cam, just to dig into one aspect, there's a challenge associated with the fact that you're separating an asset from a business and and then also having to integrate that asset at the same time. So there are both se. It seems that there are both separation and integration challenges that are occurring simultaneously. So if you're a CEO, which one of those challenges should you prioritize? And I guess more generally, you know, what's the role of the CEO in a buy side car? Vo yeah, I'll get us started and I'll invite Anna and Rui to also share their thoughts here. But one of the most important things a CEO could do is reinforce the clear strategic rationale for the acquisition and ensure that that strategic rationale is being carried through into the integration approach of this buy side carve out. The CEO can also play a very important role in communicating and engaging with stakeholders during this period. So if it is permissible for there to be interaction, and sometimes there may not be or may be severely limited, but if it's permissible in your region for the acquiring company to engage with the employees, perhaps through town halls that would be co hosted with the selling entity, this can go a long way to build trust and to the point of people and employee retention, communicating directly with employees about what this will mean for them, what the value proposition is of the newly combined organization. Perhaps there's a different scale of professional growth, perhaps there's a different scale of career pathways that could be highlighted. I like encouraging the clients that I work with to think about others that have maybe joined through an acquisition and use that as an opportunity for the CEO to spotlight successful career paths through the course of this. So for me, the top two things a CEO should be thinking about is the strategic rationale, maintaining that that focus and rigor through the process and ensuring that's being translated into the integration approach in a bespoke and tailored way and that they're thinking about those engagement points with critical stakeholders, starting with employees. Thank you, Cam and Rui. Anna, anything you'd like to add? I can add a topic. I mean, as Cameron said at the beginning, every buy side carve out is a little bit different, right? In some cases it can be simple, but in a lot of cases it gets quite daunting. As you think about the typical standard integration priorities, right? One is do no harm, right? Like we need to ensure there's business continuity, things are harmonized and there's no disruption to Bauer. And then the second one is okay, what can we do to accelerate value creation, right? And so when it comes to the kind of the role of the CEO, especially on the acquirer side, there are situations where even a simple discussion or what could be a simple discussion about what that day one operating model is, what are the things that are conveyed and can become a complicated negotiation. And in those situations, again with these objectives in mind, of making sure the transition of the employees is seamless, the transition of business and the customer relations is seamless, it can become an important topic for the CEO agenda to get involved into those negotiations and maybe finally the CEO, right. We, we, we actually looked into the role of the CEO and integrations last year. Quite a detail. When it comes to a carve out, I think there's two things that really stand out, right? It's the CEO as a chief stakeholder officer and really engaging with the stakeholders and that can be in the final stages of actually getting the deal across, really picking the battles of what it is to make sure that is agreed from a perimeter perspective but also from what is actually transferring over. But it's then also making sure, you know, really to engage with the employees and really show them what is in it for them to be part of the new co as well. So I would say chief stakeholder officer and almost like a bit of a chief cheerleader officer. And clearly culture is critically important here. How should CEOs go about gaining a good understanding of the company that they're acquiring, what their culture is and how they make decisions. And then the same thing for the people in the carve out to be thinking about like what kind of an entity am I actually going to be going to. Are there any differences in approach for a carve out versus say a standard purchase and integration? Obviously culture is a theme that we highlight quite a bit, elevating it to the same level of synergies and business performance based on past Research, we know that culture, when left unmanaged, can take the whole train off the rails. For me, in a buy side carve out, one thing really stands out, which is employees may not have signed up to work for that organization that's acquiring. Right? They signed up to join a startup or they signed up to join a unit of organization X and now all of a sudden they're being severed from organization X and they're being moved to organization Y. And I think that it's really important where human capital is a critical part of the value equation for the buyer to think about. How do we immediately, from the time of announcement use any pre close planning period? We have to really win the hearts and minds of those employees. You can do a lot with TSAs and transition service agreements. You can do a lot with the sheer elbow grease of your own organization to prepare for close. But if you start to lose the hearts and minds and ultimately if those employees that you're acquiring through a buy side carve out start to leave post close and don't see themselves as a future part of the organization, your value is going to literally be walking out the door. And so how you can immediately welcome them into the new organization, how you can help them understand the value proposition for what it means to grow your career in organization Y, how you can point to others who have been successful through past acquisitions or past buy side carve outs like this, how you can think about the bespoke career pathing that's critical to those employees or what's going to be important, whether that's through additional training. In some cases, organization Y might be much larger. And so it's an opportunity to broaden and open the aperture on the breadth of what's possible. If you're successful in the new organization, sometimes relocation is required, which can also be a challenge. We're seeing increasingly post pandemic that also in buy side carve outs as well as in integrations that there are return to office or in office requirements, how might you temporarily adjust those for a new entity as you think about bringing these organizations together? But I'm really focused on the hearts and minds. The work of culture and culture assessment is pretty similar across a buy side carve out and a more traditional we're looking at how work gets done, how decisions get made. For me, there's a really strong difference in the attention and the focus that must be put towards those critical employees, especially when the human capital is involved. Rui, maybe you could recommend an operational playbook for this kind of an integration I assume that there's a planning process that buyers should follow as we think about the central operation. Again from the integration side, right, the imo, the integration management office, there's a couple of important nuances that we kind of try to tackle and make part of the design choices early on. The first one is of course, what is the right cadence with a separation management office in most of these buy side carve outs by the time these deals are signed, there's been some level of diligence and negotiation on like what the draft TSAs are, what is the process etc and what, what that means is that on the seller side that they have probably stood up a separation management office that they've started doing a lot of thinking on those topics. They have a structure, they have a cadence. So one of the the typically one of the first questions we want to tackle early on on the acquire side is hey, what is the setup and the right cadence that we need to put in place here to interact with the separation management office? Again, they've started thinking about this a couple of months ago. We are starting now. We don't need to match what they have, but we need to figure out what that bridge is and what are the escalation paths. The second one is, as we think about the overall approach, we are big believers that the more you can do during pre close planning in any type of integration, the better off you'll be by the time you close because you can get off the close and focus on value creation, etc. Doing as much pre close planning is important. Now when it comes to a buy side carve out, not everything is under your control, right? You now have a third party out there that can and will in many cases push back on some of your of your objectives. What this means is sitting down with a separation management office early on and agree on what are the priorities. How are we going to cascade this process of figuring out what that day one operating model is? How do we switch gears into value creation? What is the role that the individuals that are on the seller side that are remaining with the seller play in supporting this transition and what is the role of the people that are coming with a buy side carvat play in this, in this equation a fourth one is quite material, right? When we do a quote unquote a vanilla integration, meaning we are either merging two standalone companies or acquiring something that is standalone, we do quite a lot of work to figure out what we need to have in place for day one readiness. But in reality there's not a lot of risk. Right. And that that happens when the two companies are naturally operating separately. We can introduce some risk if, if we decide to break some things on day one. But when, when you talk about a buy side carve out now there's a real need for a proper day one readiness check and a proper hypercare process. You will have things that are planned to be cut over on day one, things that are planned to be separated on day one. And with that obviously comes all the inherent like operational, both in terms of like customer service, delivering of product, but also internally on the, on the employee side. The final one is probably one of the most important elements of planning of the planning process, which is figuring out what is day one operating model. So here's an example of this kind of bit of a madness chaos that onsets when, when we start a buy side carve out planning process. There's an integration steering committee at the top. There's a few central orchestration work streams, part of the integration management office. There's a work stream that builds the plan and manages the plan. There's a work stream looking at synergy, synergy aspects. There's a work stream looking at culture and operating model and a technology and communications. Right. And then you have all of the functions below that, the business units, corporate functions, etc. Well, when we're doing a, a, a standard acquisition, we have a represented from the acquired and a representative from the, the, the quir company. Well, two is already complicated. So when we, when we add the, the separation element now we have three people. Well, three is a party, right. And so we have folks that are focused on the separation side. Their incentive is to get rid of the asset as quickly as possible. Right. And with this disruption, with least commitment of resources that they can, which are very opposite to the incentives of the integration team. The integration team wants again seamless operation, seamless transition, proper levels of support across the organization, et cetera. So setting up an elegant process early on with a separation office building, those relationships aligning on what the teams will be doing together and what they won't be doing together is quite critical. Anna, related to that push and pull of a buy side carve out that Ruli just described, the acquirer is going to want the best talent possible. And I'd imagine that the seller both wants to get a very good price for what they're selling, but they probably also want to keep their best talent. So what are some of the safeguards that are typically put in place by the buyer to ensure that they're getting the Asset that they've agreed to carve out of the selling company. I always say, right separations are like amicable divorces until it comes to the sticking points. And one of those sticking points is, as you just said, talent, for example. Right. Because both sides will want the best talent. So I think one of the things to agree early on is actually also in diligence already look at, right, is the talent you're getting the right talent. Is it sufficient as well to actually sustain the business on a standalone basis? Usually easy if fully dedicated, fully conveying. But what if the business that's being bought and it's carved out has had shared resources? And usually you see this in some of the back office functions. How do you then make sure that the seller gives you the right talent, doesn't upload it with talent you might not want, that might be underperforming. It becomes a nice problem for them to get rid of. Right. So I think it's doing some diligence around making sure that the seller has very clear rules of how they've allocated talent to the business, making sure you fully understand the as is, how they're working, what support they're actually getting, what's then conveying. So what is coming with the business at day one but then also asking questions around what does the seller also think and what does management team think this business could look like at a target state, what's truly needed and not. And then really diligence is also the talent you're getting there. I think one of the challenges we always see on buy side carve outs is you might have a lot of access to the seller and diligence, but you might not always have access to the act actual management team and to the, to the employees you're actually buying. So I think one of the things is to try and push for as much access as possible, of course, during diligence, but then as you get from signing to close, so to day one, really make sure you also lean in and really make sure you have potentially, you know, integration planning sessions where you can get a feel for the talent that's coming across. And obviously at day one, once you own the business, the gates are open to make sure you do the proper assessment as well. Yeah, just. Just jumping in for 30 seconds here, Sean. The one of the most commonly used words during these particular stage of the process is deal perimeter. Right. The deal perimeter basically describes what's part of that carve out. And that includes, you know, the list of people, that includes the systems, the IP like Every the legal entity structures everything. And one I think important trend we've observed here in the last year and a half, two years is a move upstream in terms of the amount of diligence that is put in earlier on in the process to defining these deal perimeter. Two to five years ago the deal perimeter was. Here's a list we think are the people that are conveying in some bullet points on some stuff. We now see teams spending a lot more time during the diligence period going deeper into and questioning described to me this why is this team in the perimeter and where is this other team that I would expect to be doing so so and so so by the time that companies come to an agreement and sign a deal that deal perimeter is, is today a lot more robust than it used to be. And, and that's, that's truly best practice. I like this concept of the deal perimeter. Are, are you seeing any differences in terms of the way that a buy side carve out transaction is structured, what the payouts are, how the valuation works, that tries to align the incentives for the seller of the carve out to actually put that good talent into the carved out business so that it's successful? Or are these typically more just single point transactions? Yeah, I can start and would love Anna's and Cam's points here as well. I've seen yes many more situations where there are clauses in the deal agreement that allow the buyer to again to have this amount of time during the pre close period to pressure test the perimeter. That that's certainly again part of this kind of new trend to de risk these, these types of transactions. And also remember that I think companies have been leaning forward more on on buyside carve outs. Buy side carve outs are complicated because of all of the reasons we talked about here and there's a lot of uncertainty about what's coming, what's not coming and companies have been willing to risk, they take more risk because they now have better and more formal ways to negotiate the terms of the contract that allow them to again come back before the deal actually closes, make sure they're, they're safe. But Cam and I don't know if you want to jump in here now. I would agree. Yeah. And maybe I can just having done buy side carve outs now for 20 years, I would say this level of sophistication of buyers has certainly increased in this time. I think there's a lot more emphasis actually put in diligence on making sure that the right perimeter and with the right perimeter as you would have heard we don't just mean the broad business areas, but really at a detailed level. What is the talent that's coming across? What are the SKUs, the products, the IP with those products. So really going out to a much, much more detailed level and defining the perimeter, but then also diligence is what you're actually getting. One of the users we're seeing more of is clean teams, which also then gives you as a potential buyer more access to actually get the right HR data to diligence. Now not every seller will give you access to that, but it's definitely an increase we are seeing around usage of clean teams. Also in diligence situation of buy side carve outs, the complicated nature of these transactions is really coming through clearly. And the asset being carved out, it seems, will always have natural entanglements with the parent company or the remain code. What's the best way to approach and unravel some of those knots that might remain? So all of these entanglements need to go through a simple decision process, right? Are they, are they, are the pieces of the asset included with the deal scope and coming over, do we, when we shift the assets, are we going to just use the buyer system? So are we basically migrating stuff from the carve out and supporting it directly from the existing buyer systems or processes or capabilities? Are we building something from scratch on the buyer side to support that activity? Right. Are we, are we sourcing that capability externally or are we cloning the seller system and separating prior to day one so that it's ready to be supported? So if we are not doing any of these things, then we need a tsa, a transition service agreement for the seller to continue supporting until the time at which point we can do one of those things. There are typically hundreds of entanglements. And entanglements again happen at a process level, at a system level, at a capability or human support level. And they're different by function, they're different by geography. So the, the larger the footprint of the organization is, the more complicated this process is. And we need to go through a rigorous step by step approach to go level one, level two, level three in each function, in each part of the business and figure out again what's in the perimeter that doesn't need support. It's coming over. What are the pieces that we are going to absorb or that we are going to build. Now this gets, you know, this becomes a rubric's cube as you add the geography element to this. Because the answer to these questions may not be the Same for the US or countries in Europe or wherever the carve out has footprint in. Right. You may have a situation where the acquire is able to absorb payroll on day one for North America, but not for Portugal, where I'm from, for example, in which case you'll need to go through this process of running water through the pipes, making sure you have a solid alignment with the seller on what that day one operating model answer is, hopefully 90% of these things will be straightforward. What is common is for the buyer to pick a couple of them that are critical for business continuity. And if we go back to kind of the tenant objectives of the integration, anything that touches a customer and anything that touches an employee is typically like, you know, red alert. Right. So we want to go through the elements of this day one operating model more carefully for the commercial functions, for the operation support functions. We certainly probably don't want the seller to continue providing customer support on day one. We ideally don't want the seller to be in charge of doing payroll for our new employees. Right. But those are certain things that, you know, either the buyer or the seller may not just be ready to convey on day one. So those are the things we want to focus on. Anna, we've talked about the importance of culture and about the day one operating model and how to resolve some of these entanglements with Romain company. Maybe you could take us through now a little bit about what is actually different when it comes to establishing a baseline and capturing the full value in a buy side carve out. The first thing I would say is that, you know, baselining in a carve out is one of those things that actually look simple on paper, but it's quite hard to actually get right in practice. And why is that right? The main challenge is that the carved out business usually doesn't have its own historic financials. It's usually an entangled business that doesn't have the true full standup cost carved out financials that you would then need to build. So even when it then does, because that's normally what happens in a sell side process, the seller would actually define what are those carve out financials? How would you stand this business up? What would be the additional costs? Think about it as this, right? Even when they do have these cars, these might sometimes build to make the company look as marketable as possible to potential buyers. So it's really important that when you look at value capture, you truly understand what is in that financial baseline and also make sure that you understand what potential standup costs might need to be included and what are the cost of the transitional service agreements and how would you exit those and what would that actually mean as well over time? So I think it's really important here too that early on that baseline can feel a bit like a moving target since TSA costs might actually not really be finalized until the very end before closing as well. Just one thing I think to also watch out for is benchmarking. Even when you add those TSA costs, your baseline might still not reflect the true structure of the standalone business. So treat all of those comparisons with a bit of a sense of salt. Make a sanity check against what you you see in the operational business. And what about the value created from synergies in these integrations? How should acquirers think about that? I think one word of caution there is to make really sure you consider TSA exits. So if you have TSAs consider what is the timing of those TSA exits, what needs to be in place in order to actually then go and fully achieve the synergies. I was working with one buy side carve out where there was going to be a ton of cross sales synergies. However, there was TSAs around, CRM system, sales support, et cetera and those TSAs needed to be handed over standard up before actually even these cross sales synergies could be fully realized. So it's very important to consider that from a timing and a quantum point of view, when you do the value capture planning and the integration of the buy side carve out as well. Got it. And on a related note, whenever companies go to negotiate a carve out, there are often dis synergies involved as well. So both on the seller side as well as on the buyer side. So what should buyers watch out for there? As a buyer you need to watch out what is being loaded into the business you're actually buying there. Now let me just explain very briefly what are the kind of dis synergy we see, right. First, there are the diseconomies of scale. Second, and that's when you have both the parent and the carved out business losing efficiency from the reduced size or volume. You then have what I call build back costs or stand up costs. These are where the carved out company needs to recreate capabilities or systems that we've previously shared or they were relying on to have these from the parent. And then there's something called stranded costs which are expenses that supported the parent but now sit with the carved out entity entity. Usually the stranded cost would remain with the parent, but there's in some instances where they get loaded into the business. So I think really as a buyer you need to like go through and look at what are those diseconomies, what are the build back costs. And here's the good news. I think you can actually turn some of them into quick wins. So if you have existing infrastructure, say a shared service center or manufacturing capacity, maybe you can absorb some of that efficiency, carved out efficiency here and maybe even offset it. I think the other thing, I was working for a big pharma company that was selling its over the counter business or consumer health business. The buyer there was able to actually take off some capabilities. You didn't need all of the regulatory quality, et cetera requirements that a pharma company needed for something that was consumer products that were an RX products. So there was an opportunity there for the buyer to actually change some of those things as well. So yes, there's dis synergies but they could really also create an opportunity. Okay, so earlier Kim and Rui emphasized the importance of the people equation in all of this. Anna, with that in mind, maybe you could tell us a little bit more about how to approach the organization design aspect of this. What are some of the things that are a bit different when it comes to the organizational side and talent management in particular? Well, you've heard us say it, right? Finalize that headcount parameter as early as possible and make sure you actually get the right people. It can be a moving target in these buy side carve outs and you might not actually as a buyer have the right visibility into the people transferring. So what you should do is make sure that you advocate for urgency and finalizing that headcount parameter, doing the diligence that you're getting the right people secondly as well, so ensure really that the right people are included in that headcount parameter. Ideally you have access. So then you can ask management team and as part of the diligence ask that management team around like detailed questions around the headcount and who's transferring? Do they feel it's the right people, it's the right capabilities, the right capacity. If you don't have it, obviously ask the seller those questions. But I always find that day one planning is a wonderful opportunity to engage and better understand this as well. I think one of the other things is in any integration there's lots of uncertainty. But in a carve out buy side carve out you have actually even more right. So one of the things we really like to emphasize is that ensure that the employees are really clear on their reporting lines on who are they going to be reporting to on day one. It's, you know, there's a lot more emotional they are being sold. The company they might have thought they joined for life is selling them. So there's all that emotion with there. But being super clear on who are they reporting to is very important. And I'll talk about what the options we see because there's I would say sometimes an easy option and sometimes there's a bit more complicated, but might be the better version. But just two more things. I think talent management requires a bit more of a hands on approach. Even more important to show up, I would say to be there as much as possible show what is the vision for the Carvel entity to become part. Explain to them what it's like being successful. How does things actually work at your company if you're buying this as well? And then finally, I think the fourth thing I would say here is if you are working across geographies, pay really close attention to the nuances and the local regulations across geographies during the employee onboarding. I'm sitting in Europe at the moment and every country here has their own specificities around that like Germany with the works council, etc. Consider that very clearly in your integration planning, making sure that all of those steps are taken care of. Thank you, Anna. So could you share an example of what an operating model might look like on day one and who's responsible for designing that model? Is it the seller and then the buyer might modify it or is it the buyer? The seller usually creates a vision of what the day one organization should look like and they do this to also make sure that the Carve co is marketable as a standalone unit. And you could decide we might take and lift and shift this and keep it as its own carve Co entity within our new code. Right. This is the scenario one. However, if you think about it, the Carve Covco specifically in the back office functions like hr, finance, legal. It might have had shared resources that didn't actually sit fully as a standalone. So it could be a really suboptimal way to have the full lift and shift of carbco. Scenario two, you would actually tuck in the finance people into the finance organization it into it for example, it's more where the employees might be in future so it actually reflect their future reporting line and it then becomes consistent. This could really also help with the employees lending. Of course, this depends very much also on the type of business you're buying. How you intend to integrate it longer term. But I think what's really important is early on is to understand do you lift and shift the full thing or do you actually kind of go ready to make sure that the employees from Carveco don't have to go through too many transitions into something where they also get a better onboarding experience because they get closer to the colleagues they're going to be working with in future as well, who can then also really, you know, you get that mutual discovery going much, much quicker as well. That makes sense. So as part of the negotiations on the transaction, does the buyer of Carvco ever say, we don't want anyone from your finance or legal teams. We are all set. And how can that play out in terms of the agreement? Yeah, absolutely. I mean, this does happen. As a potential buyer. As a buyer, you might say, I'm not interested in certain parts of the business. As a seller, it's then up to you to decide do I want to negotiate with this, do I not? Is it, you know, is it a take it or leave it or not? We usually also see as a seller is that you actually define different parameters depending what kind of buyer you would have. You would might look at your business, you know, I work a lot sell side and you might not know, am I going to sell something to a strategic buyer that has a lot of the house capabilities or am I selling it maybe to a private equity that has no portfolio company where this could be integrated into. In this case, I do want to make sure they get the right finance, legal, IT folks to come across with the business. So I think even from a sell side perspective, you actually consider that usually upfront and in many deals we see some negotiation. Now I don't think it's up to every individual talent to be negotiated, but there might be certain areas where a buyer might say, I do not need that. And Anna, could you also just share a sense for the scale of buy side carve outs? In other words, are they typically divisions of companies and how do they relate to the size of a typical M and A transaction? I mean, buy side carve outs can be very different scales. You might have the full division, full part of a, you know, that it's half the company that gets sold. This happens. Or you might have a relatively standalone, functioning division or business unit. Or it might actually be, I've been in many cases where buy side carve out meantime, it was a number of assets, a number of products that actually, you know, that actually had to be coupled together. So I once worked actually on the private equity side for someone who bought a business that didn't have any infrastructure, didn't have any legal entities, had Salesforce et cetera, but not much more than that and they had to actually stand all of that up. I worked once for a corporate buyer who actually bought a huge division, was fully autonomous with its own systems, its own contracts, et cetera. So the scale can very much differ in these buy side carve outs. I think what's been interesting to see is that I would say there's generally an increase in buy side carve out just as we've seen a bit of an uptick in separations and probably also more of these slightly more complicated ones where there's things being put together which then require more diligence on the buy side. Because it is not that fully fledged standalone business that's been working like that forever. Right. It might be something new. Understood. So we've talked about what's different in buy side carve outs for the organization design and related to that. Maybe now Anna, you could tell us what's different when it comes to culture and change management. Absolutely. Very happy to my favorite topic as some of my colleagues here know. Okay, so what is different in a buy side carb out when it comes to culture and change management? I think first of all, Cameron said it earlier, right? Avoid treating cultural integration as a peripheral task, something that can be done much later. It doesn't matter how small the carp co is, a lot of these carb codes can be very small compared to the big companies they come into now. The one thing to consider here I think is also the culture of carve co might be different than the culture of the parent company that is selling them. It's often non core businesses, it might be different types of businesses. So I think it's also very important to understand what the culture of their ways of working was. I also think Bayer needs to really make culture a strategic priority, build a phased approach that really focuses on the mutual strengths. Explaining also really what is similarities and how do things actually work here. Winning the hearts and minds matters tremendously when you're looking at a buy side carve out because a lot of times you need to very quickly get your head around who is that talent that is critical. You want men to stay and when they feel second tier, when they have been in that process and the sell side process can take quite long, you need to really quickly be able to engage and it's hard sometimes because. Because you might not get the access as Quickly as you want to as well. So I think there it's also negotiating with the seller that you do get some access. Yes, you wouldn't be talking about competitively sensitive information. You make sure the antitrust aspects work, but you do want to make sure they actually get a feel for who is it, who's buying them, making sure they understand what the vision is, where you want to take it. So thinking about that narrative on how you welcome those employees then I think, you know, really tailor the culture integration based on what your deal thesis is. I think that matters even more in a buy side carve out. It matters in any integration. But I do think you need to think about what is actually the target state here. Because you're buying a carve out, you're going to be running with TSAs day one state is very likely very different from what that target end state is going to look like like. So being clear around how you think that is going to evolve so you make sure that the narrative holds true. So whatever you promise that day one actually holds true later on is very critical here as well. I think one of the things I've learned when I've been doing like from the culture, it's also having almost like business ambassadors, making sure there's someone who can help the Carp company and that can be your integration director help really helping also bring to life what it means to be part and how things actually work very practically in your organization if you're buying this company. Thank you. So we are coming to the end of our time. But before we conclude, CAM was hoping you could take us through some of the things to think about from a technology perspective when doing a buy side carve out. Are there unique challenges that we should be aware of? Absolutely. Technology also has some unique considerations and so, and I alluded to this a bit at the beginning, the protection of business continuity through all of this is critical. And tech plays a foundational role in ensuring that that remains the case. For critical finance, legal, product, commercial, HR systems, it's critical that you ensure that continuity as well. And so having a plan for the transition of data, having a plan for how the buyer will use that data, and who at the buyer will be responsible for maintaining that Data is critical. TSAs, especially in technology, will likely play a significant role, especially if you are on a short fuse between announcing and and close. And so ensuring that you have those in place that you're ready to activate on those that your team is familiar with. The service level agreements that are established through the TSAs will be critical. And there's a regular cadence for how your organization, as the buyer will interact with the selling organization. And then finally disentangling the infrastructure. This can sometimes feel like a big ball of yarn in terms of how the systems fit together, especially on the, on the, on the seller side. And so disentangling and being clear on which systems are required, recognizing that it may not be as clean as we might wish, but it's critical to ensure, especially from a commercial perspective, that you understand where data is coming from, what the infrastructure needs to be, and that especially where they might be interacting with and working with third party software or IT vendors that you're very quickly able to port over the ability to serve to the buying organization. And so just another element to consider as that's above and beyond what we might traditionally consider in a quote unquote, more standard acquisition. Super. Thank you, Kim. So one more question for you related to technology and then a final question for all three of you. So Cam, the question for you on tech is related to agentic AI. Everybody is talking about agents right now and, and many people are starting to refer to them even as employees. Right. So as we think about that, you know, employee perimeter and thinking about them in similar context to what an employee might do. If you're doing a buy side carve out and that carve out or the carved out entity already is employing a number of agents, are you seeing any transactions where these agents are now part of the transaction? We definitely have, and I'd say it is still emerging in terms of how these agents are being used and how these agents are being applied, particularly to new assets. I would say what's the most common case is that if there's a part of the business where you're already using agents or you're using AI as it relates to some of these activities, applying those agents early on to the acquired entity is the most common practice. The next level practice then is to say, what can we do now that we have this combined platform or combined asset in addition to what we've already possessed? And how do we now advance beyond that even more? And so AI is definitely on many people's minds. It tends to be a how can I transform what I'm acquiring? That tends to be the question that people are looking to solve versus how do I apply that earlier on. So a final question for each of you is just what are you most excited about going forward? Do you see buy side carve outs continuing to increase in frequency and value? And Anna, let's start with you. So I'm most excited. I do think we're going to see an increase in buy side carve outs because I'm seeing from the sell side more preparation and what that means is more preparation in terms of looking at their companies, looking at their portfolio to see what is core, what is non core, where might others be better owners and that involves selling carve outs which others can be buying. Super. Thank you Anna Rui Picking up on Anna's point, I think we are seeing that activity increase on the sell side. I also believe that as companies get more sophisticated with their integration capabilities that we will start seeing more and more buy side carve outs and that I think unlocks a ton of value for companies. And for me personally, I love this job and doing carve outs is a bit, a little bit like doing open heart surgery. So doing more of them will, will certainly excite me as well. Thank you Rui and Cam, you get the last word. I would just say that for me, like my colleagues have shared, we are seeing an uptick and I know many of the attendees will that'll resonate as they look across their industry or thinking about their own organizations. I would say while the strategic opportunities and the value creation opportunities may be exciting and enticing, always bring the people to the forefront, bring the employees to the forefront, bring the culture to the forefront as you think about the various demands here and consider how you can bring those people along, winning the hearts and minds as this likely activity increases in the year ahead. Awesome, Cam. Anna Rui, thank you so much for taking the time with us today. Thank you. Thanks everyone and thank you to all of our listeners for joining us. We hope you enjoyed the conversation and we welcome your feedback and ideas for future podcasts. Just email us@itsrckenzie.com which stands for Inside the Strategy Room. 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