Private Equity carve-outs and procurement capability
With high valuations on direct acquisition targets, Private Equity is turning its focus to 'Carve-Outs' of existing businesses to generate value.
'Carve-Out Transactions' - the divestitures (or sales) of divisions or business units—have to clear higher hurdles for success than typical mergers and acquisitions because they are often a lot more complex. Yet recent results also prove that they can be worth the extra effort.
There are many complexities. Managing the division of procurement and the supply chain – both from a physical supplier and supply chain ownership perspective – can provide a significant challenge. In addition, defining the ownership of procurement capability is a crucial enabler of success.
Getting it wrong can lead to the Carve-Out ‘child’ being without effective supplier relationships as well as lacking the expertise, capability and capacity to manage its spend.
But getting it right can lead to immediate value creation.
For Private Equity businesses that are executing Carve-Out transactions there are some key risks to consider;
1) Splitting supply and suppliers: the basics
Every supplier relationship must be thought through and managed. Understanding the spend of the ‘parent’ and ‘child’ in the Carve-Out - and working out ‘what goes where’ is key. Spend Analysis is crucial.
To avoid supply problems, communication with suppliers is paramount; providing reassurance and timely information to avoid supply disruption.
Getting the functional workload right is equally important. Every single contract is likely to require novation to the newco. Even without any terms renegotiation this has the potential to overload a procurement function – particularly one being split (see point 3)!
2) The reverse economy of scale
Growth is a powerful cost reduction driver for organisations, providing a mathematical lever for suppliers to reduce unit costs (see Insight Article – The Hidden Value of Growth). However, in a Carve-Out the reverse can be true and the newco may find itself with less business, less leverage and less importance to its suppliers. Expect price increases, work out mitigation strategies and manage the impact.
3) Capability and who gets it
Who gets what in the split is key. This holds true for key procurement capability as well. Without due care, a newco can end up without expertise and capability but also without systems, processes and tools for basic buyer-supplier transactions.
Assessing procurement capability is a crucial early stage activity that enables the newco to operate effectively post-deal. Procura are regularly called on to conduct this assessment, providing Private Equity partners with a structured appraisal of the level of existing capability and a view on any changes that may be required.
Where capability requires significant support, Procura can provide a total managed “in-a-box” procurement service, plugging-in systems, processes and people as a ready-made function whilst the newco establishes its own capability..
4) Finding the procurement evolution
Looking forward, the newco should establish its own procurement evolution. Suppliers will respond to the future story but will require management from expert buyers. If there is a synergy story with the newco and existing portfolio companies, these need to be harnessed and leveraging cross-portfolio opportunities through group purchasing organisations (GPOs) can be utilised.
Procura support Private Equity companies through Carve-Out transactions with specialist services including:
- Pre-acquisition due-diligence to identify savings, synergies, risks and opportunities
- Carve-Out Analysis and Planning to assess and guide capability, capacity, operational delivery allocation and planning
- Procurement “in-a-box” Total Managed Service support
- First 100 days’ rapid procurement cost reduction
- Deep-dive strategic sourcing
- Cross-portfolio spend analytics
- Cross-portfolio procurement aggregation opportunity (GPOs)