Notes on DiligenceTM
Best Practices

A Carve Out, Like All Surgery, Requires Special Consideration

By Robert Carpenter-Israel on September 14, 2016
When it comes to carve out opportunities, the business case is always made that the asset will perform better out of the hands of the parent or ‘mothership’ (i.e., too much corporate overhead charge, underinvestment, suppressing potential, etc.). But there are many cases where there is value loss from separation – and that loss needs to be understood and recovered.

In diligence, we have to get a strong handle on what the losses from the extraction could be so that they can be factored into the valuation model, the negotiation (to secure the piece parts that matter or an appropriate concession, and likewise to not pay for parts that won’t matter so much), and for the construction of an effective 100-day plan.

One way we recommend getting at part of this analysis is to link key customers’ (defined as both the asset’s most valuable ones today, and the most desired non-customers) Drivers of Choice and associated brand equity to the operational construct of the business.

These diligence assignments therefore require smart probing questions and scenario building with customers to understand, by example:

  1. Why customers believe the asset is winning (e.g., rate and quality of innovation)?
  2. What enables the asset to win in that regard (e.g., customer intimacy, ethnography, R&D capability, Marketing)?
  3. Where does the capability lie within the target’s organization – and to what extent does the capability leverage skills, resources and activity of the parent “mothership?”
  4. What do customers perceive about what enables the asset to perform on the specific Driver of Choice?
The last point above (#4) is important: even if the capability exists within the parts of the operation you acquire, if customers attribute the skills to the mothership, you may soon enough pay a price post-acquisition with your customers. Customers will assume that the asset on its own will suffer without the capabilities and resources from the greater organization, and they will begin to apply their own discounts.

In diligence, when we address a carve out, we:

  1. Take the 11 individual factors in our Drivers of Choice framework (e.g., Quality and Durability, Product Portfolio Breadth, Reputation for Innovation, Reputation for Integrity, etc.) and determine the specific links that exist within the operational construct of the asset (i.e., connecting the driver of choice to the operational capabilities); and
  2. Examine to what extent the truly important and valuable skills reside in the carved out asset versus existing back in the mothership.
To truly evaluate carve out risk, great diligence takes a forensic and diagnostic look at the functional areas associated with the brand equity factors that matter most to customers.

Topics: Best Practices, Drivers of Choice, Value Proposition, Customer Retention, Investigative Research, Voice of Customer

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