How to perform a successful Carve-Out in SAP ECC and SAP S/4HANA
Why this blog post?
Over more than two decades I have seen many M&A and restructuring projects dealing with challenges on the IT side. The reasons have usually been very comparable: lack of information on the IT side, what it really means to perform such a project, and – even more importantly – often a lack of real business requirements for M&A and restructuring projects that IT needs to fulfill.
The truth is: those projects are very different from a “usual” SAP ERP implementation project for many reasons. And they need a different approach to successfully execute such projects.
This is why I want to share some insights and experiences from many M&A projects that I have been involved in. I am looking forward to sharing this over the next five weeks in this 5-part blog series.
PART I – What is an SAP carve-out?
Another New Normal
As a first starting point: the economic situation has been very dynamic over the past 2 years which usually results in a lot of M&A activities in the market.
So, is your company currently or in the future facing a divestment? The world has been faced with a long list of “new normals” recently, and a divestment is no different for your business. The big challenge with a good business decision for a Split or Carve-Out of certain business units is that they must not turn into a messy mix-up of data and information. Executing SAP carve-out smoothly and effectively are critical in the success of a divestiture, merger or acquisition. M&A’s are driven by the business, with little IT involvement until it is time to deliver; if you have worked in SAP projects before you know why this may be an issue. So, let’s start with a few things you should know to help avoid bumps in the road.
What is an SAP carve-out?
In the traditional sense of the word, an SAP carve-out is a partial divestiture within a business unit that a company carries out after selling a portion of their business to an external party. A carve-out is not an implementation project, which makes it unique compared to your typical SAP projects. They are also extremely confidential, with M&A deals taking place behind closed doors in a boardroom somewhere on the penthouse floor. This is due, primarily, to avoid the SEC knocking on your door.
There are many different types of SAP carve-outs; some, as described above, are driven by external forces, while others are internally driven. Technically, they are the same, only differences being timelines and data-specific requirements. More on this later.
Here are a few terms you should know:
Asset Divestiture: sale of company asset typically done to manage portfolio and focus on most profitable LoBs
Equity Carve-Out: creation of a subsidiary via Initial Public Offering where parent company remains majority stakeholder (also known as Subsidiary IPO, Split off IPO)
Spin-Off: like equity carve-out, but without an IPO. Parent company does not receive any cash as shares of new stock are issued to existing shareholders via stock dividend.
Business Unit Shutdown: due to a variety of different factors organization has decided to shut down a specific LoB for increased profitability, or focusing other value-adding services
Re-Organization: re-structuring company codes or plant re-allocation. Could be merging of various conflicting ERP systems into a single global instance.
Company Split: technical split of an ERP / SAP system. Could be in preparation of future divestiture or spin-off.
Questions to ask before executing a carve-out:
There are several ways and options to tackle a Carve-Out on the SAP side. So before going forward with a carve-out it is crucial we answer some questions first in order to fully understand the situation and derive the best IT approach based on the actual scenario and requirements.
What is being carved-out? Whether it’s a legal entity, company codes, a plant, or a complex combination of any of these, it is very important to know exactly what in being carved-out. This will be one main driver for the migration technology to be used.
What is the timeline? Three months is the magic number. A project with a shorter timeline is extremely hard to execute, but still doable with the right partner and experience. This is also important to understand because timelines are non-negotiable in externally driven carve-out scenarios.
Is it a share or asset deal? This will determine the IT approach for the carve-out. In an asset deal the buyer is only responsible for future liabilities from the execution of the deal. In a share deal, the buyer takes on all past, present and future liabilities which has serious data quality implications as they will be responsible for future audits. This simply means: all historical data have to be moved as well.
Who is bearing the IT costs? Sellers want to reduce the cost for obvious reasons, and buyers want to have the best data quality. These are mutually exclusive, so this conversation needs to be prioritized.
Who is the buyer? If you are selling part of your business to a competitor, you will want to make sure only the necessary data is handed over. You do not want any IP to accidentally slip through the cracks. Handling of data becomes critical in this scenario specifically avoiding full system clones that may give a full data access to the buyer.
What does the future landscape look like? Sometimes we don’t know this, so we need to extract data and hand over flat files to the buyer. Sometimes we need to set up a fresh system that is handed over. This may also apply in case you may consider to extract data from an SAP ECC system and migrate them directly into a new SAP S/4HANA system along with the carve-out project.
Knowing what questions to answer can help identify potential bottlenecks or hurdles throughout the project so they can be addressed early. Data ownership is a good example, as the result is different depending on whether this is a share deal or an asset deal.
The next step is to understand the actual Carve-Out scenario you will be facing and decide on the best option for the solution. Please follow me for more content on this in the next blog post.
Part II will be out next week: What makes carve-out projects special?
Very good read, thanks for the post.
I have a question though.
In large enterprise carve-out scenarios, will you recommend to set up a fresh system to handover at completion to ensure business continuity for day 1, instead of data migration to integrate into the buyer system?
this depends on the scenario and what the buyer would like to do.
Generally speaking handing over a separate, fresh system with unchanged processes and carved-out data will definitely help to keep business continuity and therefore will reduce the risk of any business disruption. You will eventually buy time after the actual M&A transaction for a smoother and less disruptive integration of the acquired company. From my experience this is the most often seen scenario for larger acquisitions. This approach is cheaper and faster during the M&A process, and the agreed terms in the TSA will usually also have a big impact on the approach. Sometimes the TSA simply does not give IT enough time to do anything but a carve-out in a separate system knowing that in the long run you will have another integration project coming up with additional cost.
However in some cases it might be benefitial to do the "big step" and go for a full integration right away. This highly depends of the M&A strategy of the buyer as well as on how independent the acquired part can act as a standalone company. In some cases of asset deals it might be easier and not much more complex to integrate the carved-out part into a new organization with new processes right away.
You may also want to consider any kind of harmonization the buyer wants to make happen rather sooner than later, like working under the same charts of accounts or global shared services the acquired business should use from day 1. This will require process changes in any case, so an immediate integration into the buyer's system might be very helpful as well.
I hope this helps. Lorenz
Very well articulated, thanks for sharing....