COO Insights "Growth through transformation" - Roland Berger

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TITLE | CARVE-OUTS WWHAT A TURNAROUND: Leverkusen-based chemical company Lanxess had a diffi cult birth in 2004, consolidated its position and is now – since last September – one of the most valuable fi rms in Germany. The company has risen to the heady ranks of the DAX-30 with panache: Profit (EBITDA) has almost doubled in just seven years to EUR 1.1 billion, sales are up by a quarter, and headcount is expanding at a giddy rate of 10% a year. It wasn't always like that. The fi rm started out with weak returns, painful losses and a whopping EUR 1 billion in debt. In 2004, weakened by the withdrawal of its cholesterol-lowering drug Lipobay and an ailing economy, Bayer decided to spin off its unpopular chemicals and polymer business and fl oat it on the stock exchange under the name of "Lanxess" – a combination of the French word for "to launch" and the English word "success". The skeptics had a fi eld day. Deutsche Bank described the move as "mission impossible". Journalists called the new fi rm "junk". Meryll Lynch described it as "the least profitable chemicals firm in Europe." Today, they've changed their tune. In 2004, CEO Axel Heitmann laid down the line for the managers of the new fi rm: clear hierarchies and processes, simple reporting structures, a focus on problem-solving and innovation. It worked. Lanxess has long since overtaken its former parent company in terms of its share price development and return on equity. Today, the spin-off is considered one of the most successful in modern German economic history, a model for all carve-outs to come. Carve-out. The word suggests something faintly unpleasant. But for investors, a carve-out is simply a great opportunity to take over the lucrative parts of a company rather than an often ailing whole. Private equity fi rms with a long-term orientation are always on the lookout for lines of business that could be profi table but that lack strategic value for their parent company. Carve-outs are about putting part of a fi rm that has been split off from the rest solidly on its own two feet. There are many reasons for carve-outs. Sometimes they are the result of a failed acquisition. Sometimes they follow on the heels of a crash. Sometimes fi rms are forced to get rid of their problem children as a result of mistakes by management, portfolio streamlining, debt, or simply a change of strategic course. Often a number of factors come together – as in the case of Lanxess. Corporate crises can demand major sacrifi ces. And on occasion, the owners decide that the core business has more growth potential and value than a ramshackle assortment of subsidiaries and shareholdings. No one is immune. Generally, however, carve-outs are easier at medium-sized companies than in big corporations. As a rule, the changes there – especially those with major consequences for stakeholders – meet with less resistance. But whatever the size of the company, carveouts are never easy. From the outside, a company may look like a single, closed entity. But the reality can be very different, especially in the case of international players. Such corporations often turn out to be highly complex formations consisting of structured networks of shareholdings and subsidiaries, with countless interconnections and interdependencies. The greatest challenge is identifying as many of the formal and – even more difficult – informal relationships as possible and severing them in a controlled manner. If the operation is successful, both parent and offspring thrive. If it fails, the consequences can be dire. At fi rst glance, it looks like a walk in the park. Take the necessary action with regard to the organizational structure, follow the right legal steps and voilà, you have all the necessary conditions for a carve-out. The former business unit or division fi rst becomes an independent entity, separate from the parent company. Only then is the exact type of separation defi ned: IPO (as in the case of Lanxess), spin-off or sale. The diffi culties start with the transaction costs, however. Carve-outs often overburden the organization. That means less time for other jobs. And if core aspects of corporate planning are neglected – product or market development, say – the consequences may be fatal. Carve-outs require clear management. The whole process needs to be carefully orchestrated. Ideally, the fi rm begins by defi ning a carve-out strategy. It follows this with an "exit due diligence", which looks into the various strategic options and the conditions they require. Next the fi rm calculates the key fi nancials and makes forecasts. Then comes the planning of the carve-out and divestment projects. Finally, on the transfer date, the legal process is completed and the appropriate governance structures put in place. All in all, it's a mammoth task for management. And the complexity of the divestment is only one of the traps that fi rms can fall into. 26 COO Insights | 01.2013
Managing complexity Carve-outs are a mammoth task for management. The complexity of the divestment is just one part of the challenge; the other is communication. HERE ARE THE MOST COMMON TRAPS THAT FIRMS MUST WATCH OUT FOR: 1. The carve-out is not planned from beginning to end Corporate structures often seem set in stone. Parts of the business are perceived as non-strategic but, at the same time, nondivestible – areas that the fi rm cannot easily dispose of for antitrust reasons, say. Often the fi rm fails to draw up a systematic carve-out program. Spinning off one area of business may not be enough: It could be that several areas need to go. This was the case with Bayer/ Lanxess: fi rst the subsidiary became fully independent, then it spun off certain of its own divisions, such as textile chemicals. 2. The carve-out is delayed The decision-makers in M&As often try to drag out the process. If they receive a good offer for the part of the company that is up for sale, they hold out for an even better one. If they only receive offers below the asking price, they abandon the sale altogether. Firms often fail to recognize that the entity offered for sale must be attractive for the buyer long term, and at least self-supporting. The timing of mergers or acquisitions – making the right decision at the right time – plays a major role in carve-outs. 3. The focus is solely on financial aspects Investment bankers and auditors play an essential role in acquisitions. Their advice is vital – and comes with a hefty price tag attached. Financial and operational due diligence are considered something of a silver bullet in the acquisition process. Yet there is disagreement about the contribution made by fi nancial advisors when it comes to spin-offs. The reason is not hard to fi nd. The operational aspects of the carve-out are often left to the auditors and their transaction teams, whose assessments skirt over strategic aspects such as sustainable growth and operational effi ciency. COO Insights | 01.2013 27
Page 1 and 2: COO INSIGHTS THE MAGAZINE FOR CHIEF
Page 3 and 4: EDITORIAL Dear readers, The great e
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Page 8 and 9: TITLE | TRANSFORMATION "If you want
Page 10 and 11: to leave its former core area of en
Page 12 and 13: TITLE | KNOWLEDGE Companies around
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COO Insights "Growth through transformation" - Roland Berger

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