A well-written TSA eases IT transitions.
By William Blandford, Managing Director at Blandford Associates and Member of the Board of M&A Standards
While many people have participated in the acquisition of a business, fewer have participated in a carve-out, a type of divestiture where a part of a business is sold. However, as businesses move toward a portfolio-management model, where they are both acquiring new businesses and shedding loss leaders, effectively managing divestitures will become an increasingly important skill.
Divestment has also already proven a valuable strategy for value creation. McKinsey recently conducted a survey of the 1,000 largest global companies and found that the organizations actively involved in both acquisition and divestiture created as much as 4.7% more in stakeholder returns, compared to organizations that focused solely on acquisitions.
IT Implications of a Carve-Out
There are multiple types of divestitures. Today we focus on carve-outs, which are generally defined as the sale of a portion of a business or a subsidiary. A carve-out requires a unique set of responsibilities for CIO’s and IT leaders, including the following:
- Separating the internal building phone, security and network connections, if entire locations are not included in the divestiture, and the location will continue to have both the seller and the divested business in the same location
- Reviewing systems that support the divested business and developing a plan to transition system information to the buying company
- Reviewing all the software licenses that the divested business uses, and implementing an approach to transition the licenses to the divested business or to provide a temporary “right to use” (RTU) license until the buying company can obtain the equivalent licenses with the software provider
TSA Should Clearly Define IT Services
In an ideal world, the buying company would take full, independent control of all business functions on Day 1. But just as integration takes time after an acquisition, separation also requires time after a divestiture. The transition services agreement (TSA) is critical to the process. The TSA defines all the services the seller will provide to the divested business, along with the timeframe for those services. The goal is that by the deadline of the TSA, the divested business can run independently of the seller or be completely supported by the buying company.
Some CIOs prefer not to provide IT support as part of the TSA for a variety of reasons:
- It can be difficult to maintain data access and integrity.
- The selling company may end up having to provide support for system change that the buyer decides to make immediately after close.
- The selling company can end up shouldering IT-related stranded costs.
- Preparing the TSA itself can present a challenge, as there may be hundreds of necessary IT-related entries.
Despite these drawbacks, a TSA for IT services is almost always inevitable. For this reason, the CIO or the CIO’s designee should be a part of the divestment deal team; not only can a divestment place new expectations on the IT team, but the CIO/IT designee also brings an important perspective during negotiations. The CIO/IT designee should help decide, for instance, an appropriate duration for the TSA, which IT services should be included and the financial repercussions for failing to meet the deadline.
Key IT Components of the TSA
IT is usually the largest source of TSA items because it includes everything from IT infrastructure and document management to application interfaces and company websites. Every TSA should address the following IT concerns:
- Software licenses: Some vendors object to allowing their use—referred to as the Right to Use (RTU) by the sold business during the TSA.
- Third-party connectivity: Customers, suppliers and others will have to get involved in the transition from the selling company environment to the buying company environment.
- Shared locations: All infrastructure items, from networks, wiring closets and data rooms, to printers and phones, need to be segregated.
- Third-party agreements: Infrastructure and/or application support often falls into this category.
- Cloud environments: Consider not only who will “own” data currently stored in the cloud, but also the cost to transition to the buying company environment.
- Help desk: A divestiture often requires an interim process so the help desk can transition from buying to selling company, while still managing calls between seller and buyer help desks.
- Alignment and transitioning: Cybersecurity policies usually differ, so it’s important to ensure that all IT items in the TSA comply with both policies.
To learn more about IT considerations during the divestiture process, please join us in San Diego for The Art of M&A for Divestitures and Carve-Outs. Attendees will learn the tools, framework, processes, structures and key action items for more effectively planning and executing divestitures.
William Blandford is the Managing Director of Blandford Associates, aimed at practical IT M&A due diligence and integration. He has participated in more than 50 transactions with two major high-tech companies. Blandford has successfully integrated more than 30 acquisitions and led the divestiture of 20 businesses. He has extensive experience in acquisitions, divestitures, spin-offs and internal reorganizations across the globe, with a primary focus on IT. Blandford is also a member of the Board of M&A Standards.