February 2023
The power of goodbye:
How carve-outs
can unleash value
Separations can be a once-in-a-lifetime
opportunity to create value for the remaining
and separated companies. The secret? Get
granular about support costs and personal
about talent.
by Luigi Dufour, Gerd Finck, Anna Mattsson, and Marc Silberstein
The rationale for combining businesses into one company, or for splitting them apart,
should be the same: to create more value. Yet we often hear leaders describe separations
as the opposite of M&A integrations, at least in terms of “capturing value” in the near
term. M&A, done well, unlocks value by realizing synergies. But it needn’t follow that
separations must present a drag on near-term value creation under the assumption
that the separated entity (“CarveCo”) needs to build back the same support structure
it had used when it was a part of the divesting company (“RemainCo”), or because the
transaction poses insuperable risks to business continuity.
There are costs and risks of separations, of course, but like every key business decision,
these should be considered under a cost–benefit analysis. In fact, what may seem to
be the most daunting costs of separations are often more perceived than real. Does
CarveCo need an effective support structure? Yes, but that doesn’t mean it needs the
same, equally expensive support structure that it had under RemainCo; the “scale benefit”
of general and administrative (G&A) can be vastly overstated. Could business disruptions
arise as a result of a separation? Yes, but in the aggregate, there is typically a greater cost
to standing still, and identifying potential disruptions is the first step toward mitigating
or even preventing threats to business continuity. And might employees of CarveCo feel
unnerved by the changes, or perhaps even leave? Yes, again—but employees can also be
reenergized by the transformation, attracted to a more nimble, purposeful company and
inspired to make it even better.
Any “keep versus divest” decision will always be highly fact specific; even the very term
“separation” encompasses significantly different types of transactions (Exhibit 1). For all
of the variation, however, common lessons clearly apply—the most important of which is
that separations present an unrivaled opportunity for both transacting and transforming—
by anchoring in the question “what is most value creating?” The answer is almost never to
do things the same way that they’ve always been done.
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power-of-goodbye
Exhibit1 of1 2
Exhibit
Decisions to ‘keep or divest’ are always case specific.
Examples of divestment options and dimensions to assess
Divestment options Example Details
Carve-out sale Sale to strategic Competitor acquires a business unit or assets carved out by
buyer (including the seller
PE with platform)
Sale to PE A PE fund buys the business unit or assets and creates a new,
private company
Capital market exit IPO The carved-out business unit is listed as a newly formed public
company; parent company usually retains a stake for a period of time
Spin-off/ A new public company is formed and all existing shareholders
split-off receive stock in SpinCo (or “swap” stock in parent for NewCo stock)
Merger/partial exit Merger with Competitors merge business units or assets; parent retains a
strategic buyer stake in MergeCo
Joint venture/ Creation of a new entity, which the parent company
sell stake owns jointly with strategic or financial partners
Assessment dimensions
Feasibility/complexity Value/costs Timing
• Carve-out complexity/ • Value creation/realization • Expected completion
operational separation • Transaction costs • Time-to-value realization
• Legal restructuring • Recurring (cash in hand)
• Tax impact costs/dis-synergies • Impact of other corporate
• Regulatory/antitrust • Stranded costs actions
considerations
McKinsey & Company
The right support structure
Building and maintaining effective support functions requires significant investment,
no question. Across industries, there is a significant “G&A gap” between high and low
performers of 4 to 8 percent of revenues (Exhibit 2). Understanding and addressing the
gap can translate to significant value.
While both RemainCo and CarveCo require robust support structures, it’s a mistake to
assume that RemainCo’s support structure will be necessarily applicable to CarveCo, or
that CarveCo—given its purpose, size, and type of business—needs to scale all the way
back up to its RemainCo levels for its business to thrive. In fact, we’ve found that companies
can leave tremendous value on the table if they default to making CarveCo’s structure
2
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Exhibit2 of
Exhibit 22
General and administrative costs are significant across industries, and the
gaps between industry high and low performers are notable—and expensive.
Gap between top- and bottom-quartile performance, % of revenue Top quartile Bottom quartile
0 1 2 3 4 5 6 7 8 9 10 11
Financials
Energy
Industrials
Information technology
Retail
Healthcare
Consumer products
Materials
Source: S&P Capital IQ; S&P 1200
McKinsey & Company
a RemainCo “mini me,” and elevate continuity as an end in itself, rather than to use the
separation as an opportunity to transform. Companies should choose the right operating
model for CarveCo, not just the familiar one. Five steps can be particularly helpful.
1. Create transparency
The first step in any separation is transparency. What specific roles, activities, assets,
contracts, and people should support each business? Transparency provides a baseline.
Achieving transparency is much more demanding than just a superficial review. It requires
disaggregation. Think of the way, for example, that a mechanic would disassemble a
motorcycle to understand what makes it go, or where its inefficiencies may lie. The goal
should be clarity on a microlevel, with an eye not just to “what resources is this company
using to support its operating model” but also “what resources should it be using given
its specific circumstances as a stand-alone business?” While that degree of atomization
may sound daunting, there are highly replicable templates that CarveCos can use to
create and assess detailed, structured fact bases. Typically, many of the support costs
and processes that CarveCos uncover when they create transparency and get down
to constituent parts are rightsized—were CarveCo still to be a part of RemainCo. But
when that’s no longer the case, applying RemainCo’s cost as the default setting for its
constituent businesses is almost never optimal.
2. Compare and contrast with peers
To gain a clearer sense of what the actual “right size” is, it’s essential to present a
neutral, fact-based comparison both with peer businesses and with other parts of the
business. Key focal points when comparing peer businesses include levels of automation,
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degrees of specialization, numbers of interfaces per process (this typically reveals clear
opportunities for simplification), IT systems and applications that peers use, and the legal
conditions in which peers may operate in achieving a leaner (or less lean) operation (for
example, with respect to labor rules, reporting requirements, and occupational health
and safety).
It’s important to bear in mind that, while it’s insightful to better understand peers’ choices
and outcomes, an effective separation shouldn’t solve for CarveCo to be like its peers any
more than it should solve to be like RemainCo. For example, in one separation, RemainCo
found that the finance function of CarveCo was significantly larger compared with other
companies in the same business benchmark. Rather than immediately starting to slash
full-time equivalents (FTEs), however, the senior team looked deeper. As it disaggregated
activities within the finance function, it discovered that beyond what could be considered
traditional “transactional” financing activities (such as reporting, controlling, and
budgeting), RemainCo’s finance function was actually contributing to a number of value-
adding strategic projects for CarveCo. Much of the separation and transformation efforts,
the team determined, should therefore be devoted to the finance functions—bearing
down, in particular, on what to protect, what to preserve, and how to improve. By gaining
clarity at a granular level, the function was able to achieve a relatively fast 20 percent
reduction—the “easy wins.” The next 20 percent of reductions required significant
investments in automation. These could not be made in parallel with the carve-out—but,
importantly, RemainCo, CarveCo, and any new owner would have a clear understanding
of necessary next steps and dangerous third rails.
3. Be open to nuance
While baselining and benchmarking help to recognize and prioritize areas where
significant value may be untapped, actually realizing meaningful opportunities again
requires teams to get very granular—to understand the specific activities that CarveCo
needs to conduct and to identify the appropriate level of support that its business or
businesses need, including spans of control and reporting lines. Many activities may, but
need not, be provided by CarveCo in-house. But others can often be either outsourced or
stopped entirely.
In one effective separation, team leaders discovered that CarveCo’s human resources
function was spending several days onboarding new employees and conducting
additional training sessions on an ongoing basis. Those activities were necessary before
the separation, when there were certain details and updates that many employees of the
RemainCo conglomerate needed to know. But those additional details and steps simply
weren’t relevant for the single-business CarveCo, where learning the ins and outs of the
larger corporation wasn’t necessary. Much of the onboarding, the team found, could be
scaled back, and several trainings could be eliminated. Business-specific training was
made available on an as-needed basis from a third-party provider.
By examining and aggregating individual use-case examples, companies can begin to
identify significant efficiencies. Being open to nuance helps avoid the trap of too easily
sorting into “keep/outsource/eliminate” outcomes. It’s often the case that a function that
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had employed, say, ten or more people when the business was part of RemainCo should
neither be eliminated nor outsourced, but instead reduced to a fewer number of people
who may (or may not) perform other roles. It may also be the case that in order to achieve
net reductions, hiring or reskilling people with different capabilities will be a necessary
precondition. Reductions may also need to be scheduled in sequence, as complications
can arise if every move is executed at once. Continuity, after all, matters a lot—but as a
means to preserving and creating value rather than as an end or coequal objective.
4. Rethinking technology
Technology is a unique consideration in separations. IT is itself a separate function, and
like every function, it should be scrutinized for potential cost savings and efficiency
improvements once the business is no longer part of a larger company. At the same time,
the use of IT systems, infrastructure, and support is integral to and runs across every
part of CarveCo. While RemainCo may require a more expansive range of hardware and
software, CarveCos can, in many cases, perform many—and sometimes all—of their core
needs using common applications (such as Microsoft Excel) and off-the-shelf or lightly
tailored options. This can greatly reduce IT expenses without sacrificing much (if any) of
the functionality that a smaller company needs.
Many effective CarveCos conduct joint workshops among support functions and IT
in order to align on business needs and to identify outdated and unused IT systems,
which should be eliminated. They also align on a separation approach, transitional
service agreements, and appropriate lead times to ensure that essential technology is
operationally ready from the moment the businesses are separated.
In one successful separation, the leadership team decided to stop using an advanced HR
management software; the technology was ideal for larger organizations but expensive,
and indeed obtrusive, for a company of CarveCo’s size. Choosing a less bespoke option
not only immediately and directly reduced expenses but also eased the transition to
CarveCo’s “Day 1”: the transfer of data to Excel could be done ahead of time, with no need
to negotiate a new software license or to draft transitional service agreements.
5. Create your road map
Identifying the appropriate G&A within and across CarveCo functions is a necessary but
insufficient step to building a more value-creating business. To get from point A to point
B, companies need to create a road map that spells out how to turn ideas into action. The
details and timing of next steps should be clear.
The exercise should begin with outlining the new organizational setup based upon
the activities reviewed, the opportunities identified, and the program conceived for IT
simplification. A robust road map encompasses all functions, highlights key milestones,
and identifies the interdependencies that will be critical to achieve a business-ready
CarveCo. It can also define the spans of control, reporting lines, and how different
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functions should interact with one another. While traditional road maps are useful to see
the big picture, for great maps, granularity is once again essential. Any practicable (as
opposed to merely aspirational) road map sets forth FTE sizing at the level of an individual
employee—or, more precisely, the specific activities and roles that individual employees
should undertake. The detail reaches well beyond senior management.
Better practice, still, is to anticipate what could come next and plan for scenarios under
a “next generation” organizational setup. Best practice is to spell out the next-generation
arrangement and define changes that are implemented in the premarketing, preclosing,
and postclosing phases. Those, of course, can differ depending upon the specific buyer
and real-world time constraints. Sometimes, a buyer will offer a price that is so clearly
value creating for RemainCo and above what RemainCo could reasonably expect to
receive in even the best-planned separation; in those cases, the main goal will indeed be
to get the deal done as quickly as possible while making a clean, legal break. But usually,
judicious forethought is a value multiplier. By thinking about a separation in a rigorous
and imaginative way, challenging assumptions about support structures, identifying
potential disruptions, and being very clear in planning (and communication), companies
can create the conditions that add up to a higher price—and that drive better businesses.
The more detailed the road map, the more likely that RemainCo and CarveCo will create
more value.
In addition to transaction timing, another major factor influencing the degree of
implementation of the transformation plan is the likely exit route. A spin-off or IPO will, by
definition, require a capital-market-ready organization; a divestiture to a strategic buyer
should keep degrees of flexibility to avoid postclosing restructuring costs; a financial
buyer will likely focus most on RemainCo as a stand-alone business (though likely with
some differences to come, depending upon the specific acquirer). But any buyer, even a
disbursed group of shareholders in the case of a spin-off, would recognize the upside in
transforming legacy structures and building a fit-for-purpose G&A function.
Culture as catalyst
Precisely because the opportunities are so great in separations—when every support
cost is on the table and a highly technical, bottom-up analysis is so essential—it’s
possible to overlook the personal aspect that can make or break a separation. Research
shows that about 70 percent of the time, transformations beyond the separation context
fail, and that the human element is a critical reason why. It’s natural for people to resist
change; in the context of separations, trepidation is heightened. While some jobs are
added, others are eliminated or transferred; the uncertainty would put anyone on guard.
Moreover, even the most high-performing, critical-to-retain employees can be subject
to the same cognitive biases that are long programmed into the human condition. These
include the status quo bias (“this is the way the job has always been done, so this is what
we should keep doing”) and the “prudence trap” (“this is all I can reasonably achieve, to
be on the safe side”).
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Yet just as separations are a unique opportunity for companies to shake off old
perceptions about the “right” support structures and systems, the transactions can be
uniquely fortuitous for employees, as well: a chance to break free from old expectations,
benefit from a fresh start, and help build something new. We’ve found that it’s especially
important for senior leaders, particularly at the CEO level, to lead calls to action.
McKinsey research has found that respondents were nearly four times more likely to
report a successful transformation when managers prioritized leading and developing
their teams, more than five times more likely when leaders role modeled desired changes,
and a remarkable eight times more likely when senior management communicated
openly about the changes.1
In a recent carve-out, company leaders invested significant time crafting their change
stories and sharing them with immediate teams and a broader range of employees in
small group discussions and in town halls. The excitement was palpable. We’ve also
seen the enormous benefits that can come when leaders put words into action and role
model change. Even small actions add up; for example, in one separation, the leadership
team requested for the first time that HR collect upward feedback about the leaders’
own performance. Executives also moved their offices so that they would not sit among
themselves but instead with their respective teams. Additionally, every key team meeting
had someone play the role of “value-adding police,” empowering team members to speak
up any time they felt a request for information or analysis was not value adding.
It’s natural to be skeptical of change—but it should be even more concerning when the
default is for more of the same. Separations can unlock tremendous value. The odds
for success improve when the separate company adapts a cost structure and culture
that befits its specific needs—not those of the original conglomerate. Newly divested
businesses can continue to generate and even grow revenues with a much smaller, more
appropriate support structure. But it’s the employees who may reap the greatest reward.
It’s exciting to be in a company that operates under its own unique business model and
that isn’t just a smaller version of a larger conglomerate. After all, why be a duplicate
when you can be your own best self?
Luigi Dufour is a consultant in McKinsey’s Milan office, Gerd Finck is an associate partner in the
Düsseldorf office, Anna Mattsson is a partner in the Zurich office, and Marc Silberstein is an associate
partner in the Berlin office.
Copyright © 2023 McKinsey & Company. All rights reserved.
1
“The T-word,” McKinsey Quarterly Five Fifty, March 20, 2018.
