Prioritizing People During a Carve-Out Transaction

There is no doubt that carve-out transactions are incredibly complex, particularly when it comes to separating operations and systems. While these are the “brass tacks” on the forefront of all transaction decisions, there is another critical factor that can doom a deal if it is neglected – the people. Far too often, key leadership and cultural considerations are overlooked during a carve-out, and they can derail the success of the new company aiming to establish its new identity. Stressing the importance of culture prior to the actual carve-out is vital to the success and survival of the new company.

Start by identifying the right leadership

When identifying leadership for the carved-out entity, think through not just who and how many leaders are needed but also how to align chosen leaders. In addition, having internal and external resources buy-in to the new company culture is critical to its ability to grow and attract new talent. Post carve-out success stems from understanding the past, present, and desired future culture state, as well as confidence in new ownership and company direction.

Strong leadership doesn’t just come from the C-suite

Although it is important to evaluate the C-Suite, lower level management should not be overlooked when identifying leaders. It is a common misconception that only C-suite leadership needs to be in alignment and hold sole responsibility for business transformation. Leadership outside of the C-suite must also act as key transformation agents. To identify leaders throughout the new company, one must determine how leadership decisions are made and understand how the leadership group motivates others. Some methods that worked in the old company may not work in the new one. Though it is not uncommon to see managers who “rule with an iron fist,” this can be a dangerous approach in a carve-out environment where tensions may already be high. By taking the positive “carrot” approach, management may find that they are not only motivating their people individually, but they are also fostering a stronger culture.

Defining and communicating the culture of the new company

When developing the new company’s environment, culture must be based on the complete understanding of the pre carve-out environment while also considering the controllable and organic parts. For example, one can control the elements of culture such as communication via providing open forums or “town halls” for employees; however one cannot control other organic culture elements such as a team-first mentality. The use of periodic assessments (such as focus groups or employee engagement surveys) can and should be used to get a pulse of how people are adapting to the new culture. For the controllable parts, there must be conversation about the parts of the previous company’s culture that should be included in the new company’s future while simultaneously incorporating any new ideas. Keep in mind – culture change will not happen overnight, so persistence and flexibility are paramount in culture development.

New owner, new challenges

For a carve-out, much of the impact on the new company stems from the presence of new ownership. Not only will the new company be adjusting to its own culture identity after separating from the parent company, it will potentially face culture changes introduced by the new owner. This new owner has potential to control the culture shift by introducing new leaders, financial expectations, ways to make decisions, and new ways to motivate others. The investment thesis and expectations of the agreement between the new owner and stand-alone company are key in shaping/aligning the direction of the new company. This conversation should occur well before the actual carve-out happens to ensure as smooth a transition as a carve-out will allow.

By acknowledging the importance of leadership alignment and culture change in a carve-out situation, the new company and new owner can leverage such diligence to a smoother transition to the post carve-out state. This preparation will ultimately provide a strong foundation for the new company to operate independently and continue upward success.

2 Comments

  • christopher king November 7, 2014 3:13 am

    Very well thought out!

  • Foster November 7, 2014 10:20 am

    great blog on an often-overlooked element of carve outs!

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