Doing a Carve-Out? Steve Sapletal from KPMG Explains How

[00:00:00] Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series, and in today's conversation, we're going to discuss mergers and acquisitions and, more specifically, carve-outs and divestitures.

Joining me today is Steve Sapletal, the global head of integration and separation at KPMG in the United States, and an expert in all things M&A, but especially divestitures. Steve, welcome.

[00:00:28] Steve Sapletal: Thank you, Steve. Pleasure to be here today with you.

[00:00:31] Steve Odland: We've got two Steves, so we'll try not to confuse our listeners today. But listen, KPMG has been involved with client mergers and acquisitions and KPMG's own mergers and acquisitions for a very, very long time. But just talk briefly about KPMG's capability in this area.

[00:00:51] Steve Sapletal: Yeah. Well, Steve, thanks again. Appreciate everything with The Conference Board and our relationship.

And when you're thinking of, and you mentioned mergers and acquisitions, divestitures. I coined this year, the year 2026, the year of carve-outs. And when we think about KPMG and what we do from a US and a global perspective, we have teams that are across a number of the different sectors that are specifically aligned to executing on mergers and acquisitions.

And those teams are doing everything from that upfront portfolio analysis, understanding the what and why you should do things with respect to your portfolio. What do you buy? What should you integrate? What should you kind of maintain? To Steve, then, stepping into all things due diligence and understanding the different components from a financial perspective through, you can pretty much imagine every functional work stream from supply chain to working capital, finance, et cetera. And then really lean it through to the value creation.

Organizations are doing deals for a reason, and the way we structure our teams and the process is making sure that we have teams that can help you execute on the value levers that you need to get in order to make the deals accretive to your organization. And so our teams are just organized around, I kind of say all things acquisition, all things separation, and seeing it all the way through from the front end, all the way through the entire deal life cycle.

[00:02:17] Steve Odland: Yeah, and you all are great advisors to any size company looking to reassess their portfolio. But I agree with you that '26 is a unique year. It's just been a tough year for most industries to drive growth. And one way to drive growth is to either merge or acquire other companies. But you don't think of it this way, but another way to drive growth and to clean it up a little bit is to do divestitures.

And so just talk a little bit about what's a divestiture? What's a carve-out? How are they different?

[00:02:46] Steve Sapletal: Yeah there's a saying around, that there's addition by subtraction, right? And meaning that I can spend more time—and what we're seeing in the marketplace right now is companies are looking and focusing on the core of their business. And when they're looking at business units or assets that are no longer core, can they be more valuable as a divestiture to another company? And if they get the capital from that particular divestiture, then they can redeploy that capital into their organization that is core. So we're seeing this, and I say the year of the carve-outs.

But a straight divestiture, I might be divesting an asset or a business unit or a full organization. I might just divest that, and I'm going to sell that out in the marketplace. When you ask the question about a carve-out, if there is a component of that business unit that is entangled with what's staying with what I'll call RemainCo—whether that's people, it's process, it's data, it's technology, it's customers—that's when you have to start carving out those assets. And you might divest them, so you may sell them directly to another organization or a private equity, or you may be able to spin them off, too, Steve, and stand them up as a separate legal entity. So really, that divestiture, carving out assets, to actually spinning that out in the marketplace are all different deal archetypes that organizations are going through these days.

[00:04:14] Steve Odland: So if I hear you, basically, you're using the term divestiture to mean, OK, you've got a business unit that's really self-contained. You can sell it in total, the whole thing packaged out, done. But a carve-out is more complex, and this is where KPMG's skills really are unique and important.

And that's where you've got a business unit or a business or a brand or a service or a product that's intertwined with the others where you need to carve it out using kind of a scalpel to try to figure out what pieces stay, what pieces go, what do you do with the overlap, and all of that. Is that a good layman's description?

[00:04:48] Steve Sapletal: Yeah, and what you described with the scalpel, I think where organizations have struggled a little bit in going through a carve-out is really truly understanding the complexity of the carve-out and thinking about it early and upfront. And the single biggest failure in complexity in doing a carve-out is truly understanding the perimeter.

And what do I mean by that, the perimeter? What are you selling? What's going with that particular asset? So, what people are going to be contributed? What systems, what data, what technology, what customers? Truly understanding the perimeter of what you're going to divest and being aligned on that very early into the process will help set the stage and will help prioritize the work that you go execute.

That clear perimeter defines the strategy, Steve, of what you described as that scalpel. That's the single most important thing that organizations that either do it really well are successful, or the ones that struggle are the ones from that perspective.

[00:05:53] Steve Odland: Yeah, and it requires some creativity in thinking, oftentimes, because some of these acquirers may be private equity folks or smaller folks or buyout from the employees themselves, management themselves, and they don't have all the back office systems and support.

And so, the RemainCo, as you described it, or the selling organization, oftentimes has to be creative in thinking about what services they provide post-carve-out in order to make a successful transaction, right?

[00:06:24] Steve Sapletal: Yeah, and you talked about the services. So, often called TSAs, transaction services agreements, that are outlined as you're going through the divestor process of what RemainCo Is going to contribute or continue to provide services for a period of time after closing. And you also mentioned, the buyer type. If I'm a corporate selling to another corporate, often that corporate has a lot of that back office capabilities and is maybe less interested in having all of that provided as the divestiture. Whereas a private equity organization may be buying this carve-out as a standalone asset, so there's much more interest in understanding what it's going to cost to stand that organization up when you carve it out, to leave it run as a separate standalone business within a private equity portfolio.

So you talked about the cost. There's the one-time cost to execute on the deal. There's potentially stranded cost. If I'm divesting a component of a business to another business, whether private equity or not, what are some of those stranded costs that stay with RemainCo, and then what's that cost to stand the business up? And understanding that and the buyer, Steve, is going to define some of the complexity of what you need to be thinking about as you go through the process prior to closing.

[00:07:47] Steve Odland: Yeah, and this concept of stranded cost, that's commonly used lingo. But essentially, it means that you either carve out or divest a piece, but there's remaining costs or remaining, and it's usually people-oriented, but it could be capital-oriented, that have to remain that the buyer doesn't need or want, and RemainCo doesn't need or want, and then, what do you do with that? And so describe the characteristics of those stranded costs and what's cash, what's non-cash, and why is that important?

[00:08:18] Steve Sapletal: Yeah, and one of the things, you hit the nail on the head with the people, right? It's hard, sometimes you have individuals that are supporting two different business units. One's getting divested, and that person's 50/50. So now that person has 50% capacity whether it's at RemainCo and/or, you know, it's really hard to split some of the people unless they're fully dedicated to one of those business units.

But the other one that we see that's a big component of stranded cost, which is real cash, is on the systems side of the house. And when I have large systems that we have licenses per employee, and that particular system doesn't go with the divested asset, I'm still borne all of those costs. I can't just go to a system provider and say, "Well, I just divested this. You got to reduce my cost of my system and the cost for the licenses," because I have a 5- or a 10-year agreement. So those, Steve, are costs that are truly cash that continue to hit the organizations.

And there's other examples of that. Real estate, right? You start splitting products that go out of a particular facility, and now I have a facility that's at 50% capacity, it's real cost to the RemainCo to continue to run that particular organization. So you start going through where these stranded costs stay, whether it's people, it's technology, it's real estate, and you can kind of keep going down that list.

[00:09:46] Steve Odland: Yeah, and the cash part is important from an accounting standpoint, we don't want to bore everybody with all the financial details.

[00:09:52] Steve Sapletal: Yeah.

[00:09:53] Steve Odland: But it's important because you often are trying to extract cash from the spinoff or the carve-out, and if you end up having to burn it all to deal with the stranded costs, then you're not really creating value, or much value. And so that's what's really important. And, and so there's the cash part of what's remaining to operate, but there's also, if you're thinking about, for instance, severance pay for eliminated employees, extra headcount, then, of course, that's cash out the door.

So all of these things need to be taken into account. And not just on a spreadsheet, but strategically because you're impacting the culture of both organizations, it just goes on and on, right?

[00:10:32] Steve Sapletal: And maybe one thing just to touch on. You hit a great point, Steve, and you mentioned retention, and you talked about people. One of the things that we're seeing, organizations that do this well, that do divestitures really well, really think and concentrate on the people side of the transaction. And understanding, often people think about retention of employees for RemainCo, but you also have to think about them to go to, you know, I'll call it DivestCo or SellCo.

But RemainCo, there's different techniques when it comes to how do you keep employees moving or motivated during this process. And we think of retention sometimes as cash. Like, I'm retaining these individuals, and I'm doing it by cash. But there are other strategies that are out there. It could be position opportunities when we divest a company, now, that changes the opportunities from a career perspective. There are cash components that you think about, but that's a big component of the retention, but it's also making sure, Steve, that the employees feel empowered and are involved in the process.

And I tend to say, "Are they doing it with you, or are you doing it to them?" And if you can really engage them early in the process, you can fight off some of those retention strategies or retention complications because they're involved, and they feel like they're contributing to the process and the actual divestiture. They have more ownership versus it being done to them.

[00:12:01] Steve Odland: You're so right on the people side. Everybody focuses on the financial side, but it's the people side. And it's not just the people who are involved with going. It can be the people who are in the selling organization, RemainCo, as you call it, who watch their friends go, and how the organization treated their friends. So it can have a residual impact on employees that have no involvement in any of this. So it's a big deal.

[00:12:27] Steve Sapletal: Yeah, and that last point you said around thinking of the culture, right? And you're kind of splitting an organization, often splitting culture. And what happens to the RemainCo culture now that I moved a particular business unit to another organization? And that's one of the bigger things to think about, and you mentioned it, financial. Financial is one thing, but it's the engineering and how you go through the process and the execution of it that's really going to fundamentally make sure that you get the value out of the transaction.

And you as a seller, a selling organization, you want to be viewed in the marketplace as a good seller. And Steve, what does that mean? I want to make sure that a buyer of a business unit sees that we're giving them the right people, the right systems, the right data at the right time. We're supporting the transition period for a period of time, the transaction service agreements that we mentioned. The people that are coming along with the deal are excited because now maybe there's a new excitement, new investments in that particular business or whatever that asset is.

But making sure that you're a good seller is a very important part of the process, and that could, ultimately, help you as a seller get more value for your transactions because you're doing it in an effective and efficient manner.

[00:13:48] Steve Odland: Yeah, and part of being a good seller is taking care of people.

[00:13:51] Steve Sapletal: That's right.

[00:13:52] Steve Odland: And steering and the whole thing.

[00:13:53] Steve Sapletal: Yeah.

[00:13:54] Steve Odland: We're talking about divestitures and carve-outs. We're going to take a short break and be right back.

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland, from The Conference Board, and I'm joined today by ?Steve Sapletal, the global head of integration and separation at KPMG in the United States.

So Steve, we were talking a lot about the details of people and stranded costs and all of that. Let's go back to where you started, which is the strategic proposition here. I mean, a lot of people, you talked about there being a need for an evaluation of your business, your portfolio. What is a drag on your business? What would be better off somewhere else? So there's a whole strategic side of it.

There's also a little bit of math involved here, right? I mean, if you've got a business that is underperforming, it's, let's just say it's down five and the rest of your business is up. You could sell it, and just with that sale increase your top line, which, as we all know has a big impact on stock price and multiple and everything else. So, the strategic part of it is a really important analysis, and it goes well beyond what the accounting and finance people do, and hence, KPMG's great resources here.

[00:15:05] Steve Sapletal: Yeah, and you mentioned two things, and I think I said this earlier. Addition by subtraction.

[00:15:09] Steve Odland: Yeah.

[00:15:10] Steve Sapletal: I can get much more capital play where I can allocate it to the core areas of our business if I subtract, and subtract doing a divestiture. So if I can divest something that's no longer core, it's not performing, I can get that capital and insert that back into my organization to have better capital appreciation.

You mentioned stock price. I'll say this, is organizations that are doing divestitures today, what's working for them are the ones that are successfully doing, you know, you could say active portfolio management, continuous performance management. But they're looking to divest assets, Steve, when they're still valuable in the marketplace.

And you no longer are seeing organizations waiting until it's down 10%, 15%, 20%, and then trying to divest it. They're doing it in a much more proactive manner. And I think, Steve, that's why you're seeing more carve-outs happening in different constructs and different size because they're getting better at doing portfolio management.

[00:16:16] Steve Odland: But so it sounds, Steve, like it's something that every company should be doing and on some sort of routine basis where you—and objectivity is hard, cause you've got your people, you've got your brands, you've got your customers, and it's hard to think about having part of that go away and go to somebody else. But you really have to be dispassionate and objective about this, which is why external help is oftentimes needed in this.

So how do you, when you're brought in from one of your clients, how do you approach all of this? Cause you don't want to hurt anyone's feelings, you don't want to say, "Oh, you know." But so you got to come at it strategically, but you have to be honest and open, right?

[00:16:56] Steve Sapletal: Yeah, and I think starting with the laying the foundation of, what is the strategic intent of doing this divestiture, and clarity and alignment at the top of the house, right? From the C-Suite to the board, understanding the what and the why.

And then the other thing, Steve, that's really important from an approach perspective is, it seems fairly obvious, but it's speed and communication. And what's changing and where people are being successful is if you can do some of these divestitures in an expedited manner that's not putting additional stress on the system with RemainCo.

And then I say communication of being upfront, honest, and direct about what and why you're doing things. And having an advisor that can help articulate some of those talk tracks, and the value creation story, and working with the employees, can make that process just go that much more smoother than sometimes, if it's just done internally, Steve, you can only imagine that it's a little bit of, you know, you're calling my baby ugly so to speak, right? Where it's one business-unit leader versus the other one. And, you know, that's where a third party and advisor can come in and kind of help be that bridge to show the value that you're ultimately going after.

[00:18:16] Steve Odland: Yeah, and your points on openness, transparency, honesty, all of that is really core to any successful company and culture. So it's not unique to this process.

[00:18:28] Steve Sapletal: That's right.

[00:18:29] Steve Odland: That's not what you're saying. But it includes this whole process.

[00:18:33] Steve Sapletal: That's right.

[00:18:34] Steve Odland: Yeah. That's the whole important thing. So when you've witnessed, without naming names, when you've witnessed kind of broken processes or bad carve-outs, things that just haven't gone well, what have been the key characteristics of those?

[00:18:49] Steve Sapletal: Well, I'll go back to a couple things I said at the very beginning. You know, the perimeter. So, clarity. Understanding what you're divesting. And Steve, where people have failed is they're going back to and they're constantly trying to figure out what we're divesting and why. And so clarity upfront on that is one of the most critical things.

Another one is just is having a process. Do you have a playbook that you know how to execute on? Do you have talented individuals that can lead some of those most complex areas? And I say talented individuals. It's not taking in somebody in your organization that's available, it's taking the right person.

And Steve, a lot of times that means pulling somebody in your organization to lead this divestiture that is potentially leading the actual business unit or somebody very critical but putting somebody in place and having a dedicated team and structure. Again, if they're doing it as a third or fourth project, it's probably not going to have the right execution. Decisions are not going to be made. Things are going to take longer. You're going to have poor communication.

So you asked the question around what's caused some of the complications and the challenges. Clarity, dedicated team, and I would say leadership involvement at the very beginning, and then the obvious: having the structure, the process, the methodology, the playbook to know what you're executing and why.

[00:20:19] Steve Odland: Yeah, and you mentioned speed, which is part of all of that. I mean, these things can take sometimes a year or more, which that's a long time for a business. And then you're trying to hold the business together with its customers, employees, and make sure that the employees don't leave and find new jobs and you ended up with no talent, and you ended up with lost customers, and so the business value declines often during this process.

[00:20:42] Steve Sapletal: Yeah. And often in these deals, there's probably two to three months where there's a very small population that even knows it's happening And then there becomes a decision, and then you start to go through that next three to four months, like you talked about, Steve.

And the form of working with the customers and—you know, one of the things that we often deploy, you're doing a divestiture, so you're going through the whole separation process, understanding the entangled assets on people, systems, et cetera. But one of the more important things to think about is what is that business-continuity plan? So what are you making sure, Steve, that you preserve during this timeframe? And that's the customers, that's the value in the business organization. It's your people that you're going to potentially keep or potentially push with the organization.

So having that business continuity and preservation plan is as important as what you're thinking about doing value creation when you do the divestiture. Because if you lose, like you said, Steve there's speed, but if this is taking a long time, it is a distraction. So how do you preserve that distraction?

[00:21:51] Steve Odland: Another whole layer of activity is the regulatory process and approval from the appropriate government agencies. And that can extend this. It also can end up in success or failure. And at the end of it, if you get blocked, you are going to continue to own that asset. And so this whole "how you handle all this" really could put you in a good or a bad position in that case, as well. There's a lot of complexity there.

[00:22:17] Steve Sapletal: Yeah, and you're seeing some of the larger, I'll say, larger divestitures, the mega-divestitures that might be sometimes going through the regulatory process, and there's a competitive nature of that regulatory process that causes you to not be able to go forward.

And Steve, you hit a great point on going through that process, you need to—there's a little bit of 50/50, is it going to go through? So you need to make sure that you're being very mindful with that separation planning from a people perspective. That's why I say being a good seller, because you might be going through the process, and six months later, nine months later, it gets declined from a regulatory perspective, and now you own that asset. And you need to make sure that you can continue to operate that asset or that business unit after the fact, if that happens.

So definitely, that's where that business preservation, business continuity plan, Steve, comes into play to help make sure that you're thinking about it and preserving it at the same time you're thinking about it to divest it.

[00:23:18] Steve Odland: Yeah, and there's a lot of cases of, situations where an asset's being marketed or being sold from one corporate to another corporate. The buying corporate gets all of the IP and the inside information, and so forth that gets blocked, and then the buying company doesn't have the asset, but it has all the information to go and exercise, and it ends up shifting tremendously.

Anyways, lots of, lots of stories on this, but the whole point is this has to be done as quickly as possible but as carefully as possible, as professionally as possible, resourced with people and attention, everything in the proper way, which is why outside advisors are important in all of this, right?

[00:23:58] Steve Sapletal: Yeah, and I think having, Steve, having an understanding of what you need to do, when do you need to do that, how can you execute the best on that, how do you govern that, how do you make decisions, what does that structure look like? And as I said at the very beginning, and one of the questions you asked, is making sure that you understand and have been very thoughtful early on, cause divestitures, carve-outs are the most complicated transactions that you can have.

Now, don't get me wrong, doing an acquisition and integrating it can be complex, as well. But when you're divesting something and it's impacting RemainCo, and I'll call it DivestCo, and there's two different bodies that you're impacting, and it's your company until it's sold. And even once you sell it, you want to make sure that it's successful because they were part of your organization. So that complexity, planning early is just, Steve, one of the pillars of how you're going to be more successful in this process.

[00:24:59] Steve Odland: Yeah, and they're still your people, and you care for them, and they're still your babies, the businesses, and you still care for them, all of that, which we've covered.

Steve, any last thoughts that we haven't addressed that you wanted to share?

[00:25:11] Steve Sapletal: I guess the only thing that I would, we touched on, but maybe I'll add, is around—and I think often, what should be important from a C-Suite, what should be important from a board perspective? And we talked about cost, understanding cost, stranded cost, TSAs, but making sure that there's a very clear value story.

And Steve, if companies are doing these better today than they did five years ago, it's because they understand the asset, they understand the process. But they're also, before you put an asset up for sale, you're actually going through and doing value creation on that asset earlier on. Because, Steve, then you can get credit for some of the learnings or credit for some of the plans because you've been executing them, versus just identifying them at the time of sale, cause a buyer's not going to actually price that in because they haven't seen it. So really being more proactive in doing that.

[00:26:12] Steve Odland: So what you're saying is, if I understand, oftentimes people put a book together or a selling pitch that includes a hockey stick to the moon on revenue because of all these grand plans. And your point is, yeah, that sounds good, but everybody kind of is onto that. And so therefore, if you can have some of those plans in flight and demonstrate a little bit of success on that, it validates the future possibilities.

[00:26:36] Steve Sapletal: 100% correct, Steve. That way, that value can be priced in for upside for you, versus a buyer will just normally discount that and say it's not proven, it's a plan that hasn't been executed. So the earlier you're thinking about doing a divestment, you're thinking about how can I improve that business, can I improve margins, can I improve markets, can I improve certain components that I think I can get credit and I can write into my divestiture value story.

That's something that is, is still organizations are learning to do as they go through the process. But that's definitely a best practice.

[00:27:13] Steve Odland: All right. That's awesome. We'll leave it there. ?Steve Sapletal from KPMG, thanks for joining us today.

[00:27:19] Steve Sapletal: Steve, well, thank you, and thank you for The Conference Board. Always a pleasure.

[00:27:23] Steve Odland: And thanks to all of you for listening to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.