Separating value

Getting the most from your disposals

As many financial services organizations may be taking their first steps on the road to recovery, most analysts agree that there is likely to be a wave of complex disposals and separations across the industry. Smart sell-side separation planning could enhance your realized deal value by as much as 30 percent. Scott Marcello, Moh Sheikh, and Chris McGolpin discuss some of the common separation challenges and present their blueprint for a positive separation.

Ignore separation planning at your peril
Following the turmoil in the financial services sector, a significant increase in the level of disposals and restructurings is expected. But in the rush to get the deal done, it can be easy to underestimate the complexity and financial impact of separating businesses - and that can have a serious negative impact on the deal value, success of the separation efforts and ongoing success of the retained business.

When it comes to carving out part of the organization, many businesses lack a coherent grasp of how their people, processes, assets, contracts and technology are integrated around the world and across functions. Knowledge of these issues tends to be fragmented, with no infrastructure to develop an informed view. This can make separation very challenging and more importantly, failing to address this can increase complexity and destroy value.


What can also be neglected is the emotional and political impact of separation on people. Managers and employees tend to separate behaviorally before the deal is done. It's vital to deploy a process that aligns the interests of both the selling and separating entity, and fosters a collaborative rather than an adversarial approach to separation. Too often we see clients failing to do this.

   

Good separation planning boosts buyer confidence and protects value
In a market subject to aggressive 'price chipping' by purchasers, good planning focused on value and risk drivers is one of the best tools to make the most of value from disposals. Demonstrating a detailed understanding of what it will take to transition from an integrated to a separated state will enhance the vendor's confidence in the carve-out financials and your ability to deliver the separation, giving potential purchasers less ground to discount their offer. In our firms' recent experience, prompt and well structured separation planning can help enhance valuations by up to 30 percent. It also enables effective execution, mitigation of key issues and risks and maximizes the value of the remaining business.


Building the separation blueprint
Working with a number of financial services organizations KPMG firms' professionals have found that one of the keys to effective separation is the creation of a detailed blueprint. It enables bidders to value the business and, putting it together helps the vendor and the separating business understand the nature of their future relationships. The blueprint should clearly articulate what the business operating model looks like today, when the deal is closed and at full separation.

A detailed implementation plan should also be in place. Key components of a separation blueprint should include:

1. Confirm the separation principles - define and agree at executive level the core principles that will shape the scope and scale of separation.

For example, do you migrate the standalone business to a new technology infrastructure at deal close, or will you 'clone and go' or will you carve-out the technology platform and transfer across? What basis will you use to decide which people go with the separating business? Issues like this will affect the scale of work involved in separating and enable timely and consistent decision making.

2. Prepare a 'separation hotspot' matrix to identify key operational touch points highlighting those that are materially significant and need to be addressed for deal close. Once interconnected parts of the business - like technology platforms, people and shared service centers - are identified, it is easier to break down potential issues according to their impact on people, processes, technology, contracts and assets and to quantify the cost impacts and separation challenges.

  • Often there are between 200 and 300 separation hotspots identified between parent and separating entity, where management originally thought there were few. In our firms experience the top 20 'hotspot' issues typically account for 80 percent of the separation costs, so it is imperative that these are identified and actioned early. Many organizations underestimate the challenge and workload involved in separation.

3. Define detailed functional Service Delivery Models (SDM) - define how each function will operate at key stages over the transaction cycle (as-is, deal close and final separation) in terms of people, processes, assets, contracts and technology. Separated entities may well not be fully standalone at deal close, so vendors need to prepare a broad range of Transitional Services Agreements (TSAs) early to decide what is/is not offered and at what price to try to ensure operational integrity. A detailed set of functional SDMs will assist the identification and articulation of the required TSAs to support the standalone business.

 

4. Create a separation cost adjustment model to understand the cost implications of separation: what are the one-off costs of separation? What are the ongoing cost impacts of separation? This will allow sellers to strip out group allocated cost and direct costs and rebuild a bottom-up cost model for the separating entity.

Plan well = increase the value
Selling a business or division may make strategic sense, but unless the separation challenges and the cost implications are understood, it can massively impact the sale value of the business. It can also leave the operational team responsible for the separation with a major headache. One of the key lessons is to invest time and effort upfront to identify all the separation touch points and prioritize those where costs and risks will be material as this can potentially boost the sale price and mitigate the risk of damage to the parent business.


Article authors

Scott Marcello
Joint Regional Coordinating Partner
Financial Services Americas region
KPMG in the US +1 614 249 2366 Scott Marcello View all articles by this author

Chris McGolpin
Associate Director
KPMG in the UK +44 20 7311 1467 Chris McGolpin View all articles by this author

Moh Sheikh
Associate Partner
KPMG in the UK +44 20 7311 4492 Moh Sheikh View all articles by this author