Experts from Eight Advisory share actionable insights on leveraging carve-outs to thrive amid global disruption.
In a business world redefined by economic uncertainty, geopolitical turbulence, and fierce competition, the pressure to adapt quickly has never been greater. For companies navigating these challenges, one solution is gaining traction: carve-outs.
Far from being just a financial maneuver, carve-outs have emerged as a strategic tool to streamline operations, refocus resources, and unlock untapped value.
Experts Tom de Troyer, Partner at Eight Advisory Belgium, and Rob van den Berg, Director of Strategy and Operations at Eight Advisory Netherlands, explain why now is the perfect time to embrace carve-outs and how businesses can avoid the pitfalls that often come with this high-stakes process.
Why carve-outs are gaining momentum
Gone are the days when companies diversify their assets in the hopes that when one division fails, another will carry the load. Instead, many companies are leaning into their strengths, divesting non-core operations, and redeploying capital where it can generate the most impact. As Rob van den Berg puts it: “Companies are trimming down and increasingly focusing on what they’re good at. This creates additional cash flow that can be reinvested into their core business.”
In 2023, carve-outs accounted for nearly a quarter of all deals, compared to less than 5 percent before 2020, according to a recent Eight Advisory whitepaper. This shift reflects how businesses are adapting to today’s challenges:
• Tighter financial conditions: Rob van den Berg explains that some companies are pushed to divest as they face financial distress. This is the case in the current global economic climate. “A few years ago, businesses could get money to invest in the organisation at relatively low interest rates. However, this has become more difficult over the last couple of years, partly due to geopolitical developments, supply chain disruptions, the COVID-19 pandemic, and a stagnating economy.”
• Competitive markets: With margins under pressure, keeping underperforming divisions that drain resources is no longer an option. “It doesn’t make sense anymore to keep something in the business if it’s only costing you money and management attention without any return”, says Van den Berg.
• Evolving priorities: ESG trends and consumer demands are reshaping portfolios as companies divest non-aligned or low-margin businesses to focus on growth areas. “To be successful as a business, you have to invest in the direction the river is flowing”, De Troyer says.
Van den Berg agrees: “We need to deal with a higher degree of uncertainty these days and we need to consider things like how the geopolitical changes that we’re currently seeing will impact our businesses. You need to take that into account during your deal’s due diligence.”
The protectionism we’re seeing globally will also have an additional impact on economies, both locally and internationally. “It might be in the form of regulatory changes or tariffs, but we can’t be surprised by it for too long or it will affect our businesses”, he says. “We have to adapt, whether we like it or not.”
Not to mention, the lack of available disposable income due to current economic challenges is having an impact on market spend. This especially affects companies in the industrial and consumer industries. “Because of this, sector focus and experience are becoming increasingly important when organisations are looking for M&A advisors and deal partners”, Van den Berg explains.
Unilever’s recent portfolio rationalization highlights the trend. “They’ve done a lot of portfolio rationalisations over the past couple of years, including selling their tea, and margarine businesses, and currently working on the disposal of their ice division”, says Van den Berg. “They’re focusing on their personal care products, where they are experiencing higher margins.”
The hidden complexity of carve-outs
Despite their benefits, carve-outs are not simple plug-and-play transactions. “Carve-outs are completely different from normal M&A deals”, explains Tom de Troyer. “When you divest a business unit, you need to think of how it would operate as a standalone business. You can’t think about it purely from a financial perspective, because in many cases you are dealing with corporate group costs, which are allocated based on high-level drivers like revenue, or the number of FTEs in the business, which doesn’t show the reality of the unit’s cost structure.”
De Troyer warns that, if you push too many costs to your carve-out entity, the value will go down. “You have to think of what the company needs to operate on its own in terms of people, processes, assets, and IT-systems and then translate that into financials.”
M&A professionals must also master the art of negotiation, including crafting Transition Service Agreements (TSAs) and securing buy-in from employees who will operate the carved-out business. “A deal only succeeds when the vision for the carve-out aligns with the people responsible for making it work”, he notes.
How to get carve-outs right
The experts at Eight Advisory highlight three critical factors for successful carve-outs:
1. Start early: “Companies that do well with carve-outs think about the ‘what, how, and why’ early on”, says Van den Berg. Defining objectives, identifying potential buyers, and preparing for due diligence long before the transaction is essential.
2. Understand industry shifts: ESG priorities, economic pressures, and geopolitical trends are reshaping deal dynamics. For instance, several companies in the meat industry are divesting non-core activities partly because it aligns with their ESG goals.
3. Leveraging technology: Modern tools are transforming the carve-out process, from advanced data analysis that accelerates decision-making to project management platforms that streamline implementation.
“In the past, it would take a lot of time to calculate a carve-out impact, and now there are solutions that speed up this process and immediately visualize the carve-out impact”, says Van den Berg. “Not to mention all the technologies that help you implement carve-outs, like project management tools that make the actual implementation more efficient and effective.”
Seizing the carve-out opportunity
Carve-outs are no longer niche transactions for niche times. They are a vital strategy for businesses facing today’s dynamic challenges. By adapting to market realities, harnessing technological advancements, and approaching carve-outs with clear vision and meticulous preparation, companies can turn complexity into opportunity.
For M&A professionals, the task is clear: the time to embrace carve-outs is now. Tom de Troyer concludes: “Think ahead, know your market, and be prepared to adapt because the businesses that succeed are the ones ready to shape their own future.”
Read also: Successful carve-outs in challenging times
