The automotive industry is in a state of flux, facing a powerful combination of external factors. These include increased competition, the rise of electric cars, regulatory changes and new forms of mobility, such autonomous driving and connected cars.
To meet the challenges posed by new technologies and changing business and service models, automotive decision-makers are increasingly looking at far-reaching reorientation or restructuring initiatives, such as carve-outs, whether for individual business areas or entire companies.
A targeted carve-out of a separable business unit or corporate entity is often seen as an opportunity for the entity in question to completely transform and reposition itself for long-term success. But it must be managed carefully and efficiently if these objectives are to be achieved.
What is a carve-out?
A carve-out is the spin-off, split-off, or sale of a business unit, subsidiary, or business segment. What makes it different to a normal disposal or divestment is that the entity being ‘carved out’ is not independent, but is either fully or partially integrated prior to the restructuring.
The aim is twofold:
- To separate out certain business units from the existing organisational structure by streamlining the portfolio (e.g. through divestment).
- To make these units an entirely separate entity from a corporate and tax perspective.
After this has been accomplished, the newly created entity (or ‘NewCo’) offers numerous strategic opportunities, from an IPO to a sale to other companies in the automotive industry or investors such as private equity firms.
For the parent organisation, the move provides interesting opportunities for development, especially through increased control, and new possibilities for investment or acquisition. The advantages may include additional opportunities for tax optimisation or cost reduction.
Carve-outs thus offer the NewCo further options for capitalisation and enable the parent entity to accelerate the strategic realignment of its core businesses.
Successfully managing the complex challenges of a carve-out, as well as defining a clear framework and basic guidelines for the transformation, requires careful preparation, centred around three key stages:
- Defining the structure of the carve-out entity with regard to the target operating model (TOM). The focus is on separating and reallocating the resources to be assigned to the NewCo, such as specific processes, systems, assets, people, and contracts.
- Preparing the NewCo and ensuring it is fully operational from day one, in line with the TOM. This relates mainly to the transfer of personnel, which is essential for a well-organised transfer of operations. It also involves controlling post-closing access to shared assets (via transactional and long-term service agreements), defining the operational requirements of the process, or system landscape and their associated data structures, and implementing a governance model for subsequent management structures.
- Appropriate financial reporting structures must be adapted or created for the NewCo. These are needed for the transaction (and the associated evaluation of the carve-out entity that may be required) even before the start of operations.
Each of these areas presents significant complexities and considerations. If done well, a carve-out can be an attractive option for delivering long-term added value. But if not, any added value may be hard to come by, or at best, risks being very short term.
Over a series of short articles, Mazars experts will examine key steps to consider during the carve-out from a range of different strategic perspectives: