What makes carve-out projects special?
Okay, so now we know what an SAP carve-out is (see my first blog post here), let’s spend some time trying to understand what it is about them that makes them so unique when compared to other, more traditional SAP projects.
Remember how we mentioned the secretive nature of M&A deals in last week’s blog post? Well, this is a big deal. For starters, the c-suite would like to limit their exposure with the SEC. To do this, they keep the decision-making process concentrated amongst very few people (think CEO, CFO, M&A specialists and legal – definitely NOT the CIO).
I always tell the story of an IT Director calling me frantically at 5pm on a Friday, asking me what I knew about SAP carve-outs. Turns out, the CFO had just walked into her office with an M&A contract stating they had sold a business unit. It was now up to her to figure out how to separate the systems, segment the data accordingly, and deliver all this within a short 90-day timeframe. That 90-day timeline was what concerned her the most. “This is a must deliver by date. There is no room for failure, or my job is on the line” she said.
This is of course anecdotal, but I’ve had similar conversations in the past to know this was not just a one-off call. M&A’s are 100% business driven, so no one in the room even thinks twice about IT complexities when discussing multi-million (sometime multi-billion) dollar mergers or acquisitions. The overall cost of delivering such a project is insignificant compared to the overall deal. This makes it extremely easy to overlook. But without flawless execution you could potentially run into career-ending penalties or extremely high additional cost depending on what has agreed on in the TSA. I’m not exaggerating. A 5% late penalty on a $200M deal is $10M – which may be about 10x the cost of the IT portion of the project.
Another unique aspect of carve-outs is that you are always dealing with separate systems: the seller and the buyer. Well, this is not true for ALL carve-outs since some can be strictly internally driven like system splits or internal restructuring. But when dealing with traditional two-party M&A deals, there will always be two systems (sometimes more in complex scenarios, but this is besides the point). In this case it is critical to understand a few different things:
- Asset vs Share Deal: this really should be the first question asked as it has huge implications with regards to data, and hence the level of complexity. In an asset deal, as the name implies, a company is selling assets for cash. Think of a logistics provider getting rid of their truck fleet to focus on brokerage or a huge soda producer selling one of their brands including inventory, production facilities and warehouses. In this scenario, the buyer is only taking on future liabilities from the execution of the deal. This means, there is no need to hand over any historical data that isn’t necessary to maintain day-to-operations running.
On the other hand, in a share deal the buyer is purchasing stock ownership of the company, so they are taking on not only future, but past and present liabilities as well. This means, that all relevant transactional and historical data needs to be handed over in case of future audits. Know this early on, can give you a huge leg up on understanding a planning for the execution of the carve-out.
- Who is the buying/selling party: this is really a two-way question. The buyer needs to try and understand the seller, and vice versa. Selling to a competitor is completely different that selling to a business completely unrelated to what you do. You also need to know as much information as possible about what ERP they are running, or how they would like to receive the data. Are we handing over a full, operation SAP system, or just handing over flat files. Sometimes we don’t have visibility into the buyer or dealing with a private equity firm, in this case we are likely extracting the data in scope and handing over flat files for them to do as they wish. Simple enough.
- What exactly is being carved-out: this is self-explanatory. From an SAP technical perspective, are we carving-out a full legal entity represented by a company code, or part of a company code? Is it a plant, or another type of SAP organizational object? Knowing this becomes the final piece of the puzzle to help you determine the road ahead and start planning for execution.
Despite all the unique elements of SAP carve-outs, many tend to be very standardized scenarios for experienced partners working in this space. There are specialized software and tools to deal with data migrations and deletions, as well as specialized partner service offering varying degrees of flexibility in how data can be extracted from the source, mapped and later imported into the target.
My advise: Early engaging partners with vast M&A experience on both the technical and business sides of the equation will help better prepare for future mergers or acquisitions.
In my next blog posts I will talk about the Business Scenarios and technical Options for SAP Carve-Outs and possible impacts on your journey to SAP S/4HANA. Feel free to follow me: @lorenzpraefcke