Navigating Carve-Outs: Treasury Transformation and Zanders’ Expert Solutions 

The corporate landscape is continuously reshaped by strategic realignments such as mergers, divestments, and other M&A activities, wherein a company divests a portion of its business or acquires other businesses to refocus its operations or unlock shareholder value. These transactions greatly affect Treasury management, influencing cash flow, banking structures, financial risk management, financing, and technology. This article explores the challenges Treasurers face during the disentanglement or carve-out process, emphasizing the need for strategic realignment of Treasury activities and focusing on the Treasury perspective of a divesting company. It acknowledges the transitional complexities that arise and the demand for agile response strategies to safeguard against financial instability. We will have a look at the special carve-out situation of building a Treasury function for a stand-alone company in a second part of this article.

Treasury Challenges in Carve-Out Situations

In the dynamic world of corporate restructuring, carve-outs present both a new frontier of opportunity and a multifaceted challenge for Treasurers. While divesting a part of an organization can streamline focus and potentially increase shareholder value, it can place unique pressures on treasury management to reassess and realign financial strategies. 

When a corporation decides to execute a carve-out, the Treasury immediately takes on the critical task of separating financial operations and managing transitional service agreements. From the perspective of the divesting company, preserving liquidity and ensuring compliance with financial covenants is a key priority. This intricate division process demands the disentanglement of complex cash flows, re-evaluation and unwinding of cash pooling and internal as well as external debt structures, as well as a review of financial risk and investment policies. Such an endeavour requires rigorous planning and flawless execution to ensure that operational continuity is maintained. Additionally, it requires going into the details, such as the allocation of planning objects (e.g., vendor contracts, machines, vehicles) to the right business for purposes of liquidity forecasting. 

Our experience shows that factors like company revenue, industry complexity, and operating countries affect the volume and frequency of treasury transactions. This can increase complexity and workload, especially for intricate transactions. An interesting remark is that carve-out transactions also impact the remaining group. Potentially, the geographic footprint is smaller, or the number of individual business models within the group is less than before – with a significant impact on Treasury. 

The Role of Technology in Carve-Outs 

A key component in the disentanglement process is represented by Treasury technology. In evaluating treasury technology during a carve-out, scrutiny of the landscape and meticulous planning are paramount to ensuring a smooth transition. The systems must not only handle specific needs such as segmenting data, independent entity reporting, and tracking discrete cash flows and risks, but they must also facilitate a seamless detachment and swift reconfiguration for the newly autonomous entities in the course of the disentanglement of a business. It is essential that these systems support operational independence and continuity with minimal disruptions during the restructuring process.  

Implementing the right technology for the new entity, e.g., to cover stand-alone requirements, is crucial. It must meet current transaction needs and be robust enough to handle future demands. Given our breadth of experience across various technological domains and in various M&A scenarios, we have enriched many discussions on which solutions possess the adaptability and scalability necessary to accommodate the evolving needs of a redefined business. 'Right-sizing' the systems, structures, and processes, tailored specifically to the unique contours of the carved-out entity, is a decisive factor for laying the groundwork for sustainable success post-divestiture.  

Strategic Realignment for Treasury 

Any M&A transaction significantly changes the Treasury Process Map for both the remaining group and the carved-out entity. It has inherited risk and different risk types. We think that Treasury should deal with operational risks first, such as filling resource needs and/or stabilizing business operations. The resource issue requires an analysis of the available employees and their specific skill sets. Onboarding interim resources and back-filling resource gaps until the onboarding of dedicated new staff are alternative options to cover shortfalls.  

The operational issue focuses on the impact on cash management and payment operations. Treasury needs to assess the impact on the existing banking and cash management structure and on liquidity as funds received by one entity are required by another. Bank relationships are foundational to Treasury operations and must be revisited and sometimes reinvented. Treasuries must work diligently to maintain trust and communication with old and new banking partners, articulating changes in the company's profile, needs, objectives, and strategies. Beyond negotiation and administration, the process often entails renegotiating terms and ensuring that the newly formed entity's financial needs will continue to be met effectively. The technical and operational ability to execute and receive payments through the company’s (new) bank accounts is a core requirement, which needs to be at the top of the list of priorities. Next, centralization of liquidity and cash structures is essential to avoid cash drag if inflows cannot be invested and/or concentrated in a relatively short time. 

Treasury may also deal with different types of financial risk, such as interest rate or foreign exchange exposures. The financial risk management perspective is a crucial one for companies, but in the context of carve-out activities, it is often a second-order priority (depending on the financial risk profile of a company). However, proper identification and assessment of financial risk shall always be a top priority in a disentanglement process. Process implementation can be approached following the establishment of sound business and treasury processes if there is no significant financial risk.  

If your organization is contemplating or in the midst of a carve-out, contact Zanders for support. Our consultative expertise in Treasury is your asset in ensuring financial stability and strategic advantage during and post-carve-out. Let Zanders be your partner in transforming challenges into successes.