The Impact of Carve Outs and Spin Offs on Corporate Treasury
Increase in corporate carve outs and spin offs. From a treasury perspective, the essence of a carve-out project is that the business that is being carved out needs a fully functional and standalone treasury operation upon ‘go-live’. This typically means setting up a dedicated team, processes, systems, cash and liquidity (banking) structure and standalone financing arrangements. But how do you implement a completely new treasury operation under tight timelines that sometimes can be less than 12 months?
Over the past three years, the market has seen an increase in corporate carve out and spin off activities. This trend is predicted to continue as businesses continue to face increasing competitive pressures and shareholder activism. In response, companies are realigning their business portfolios and focusing on growth in core strategic areas.
Prime examples of recent carve outs and spin offs include Philips’ spin off of its lighting division via an IPO in May 2016, resulting in Signify, a leader in conventional, LED and connected lighting.
Another example from 2018 is Akzo Nobel’s carve out and subsequent spin off of its specialty chemicals business to create Nouryon, a global specialty chemicals leader operating with over 10,000 employees in more than 80 countries.
In October 2018, Honeywell International Inc, as part of its portfolio transformation strategy, spun off its transportation systems to publicly traded company Garrett Motion Inc.
In August 2018, AP Moller-Maersk, a Danish conglomerate, announced a spin off of its offshore oil drilling operation and to list it on Nasdaq Copenhagen this year, so that it can focus on its transport activities.
These examples demonstrate how some conglomerates are using spin offs to reduce their portfolios in search for value and focus. But what is the impact on Corporate Treasury and how do you manage the treasury scope of such a company-wide project?
The essence of a carve out and spin off project
A carve out results in the separation of a business unit(s) or division(s) to form a new independent company that subsequently can be spun off, for example via an IPO or acquisition by private equity. From a treasury perspective, the essence of a carve-out project is that the business that is being carved out needs a fully functional and standalone treasury operation upon ‘go-live’. This typically means setting up a dedicated team, processes, systems, cash and liquidity (banking) structure and standalone financing arrangements. But how do you implement a completely new treasury operation under tight timelines that sometimes can be less than 12 months?
Insight and learnings
While acknowledging that there is no recipe or standardized approach for such an extremely complex project, our involvement in numerous disentanglement projects have provided some valuable insights and learnings, resulting in the following suggested key steps:
1. Understand the guiding project principles for the carve-out project
Typically, larger carve-out projects are done on the basis of a ‘copy and paste’ approach, keeping processes, systems and structures for the disentangled part of the company as close as possible to the current situation. This subsequently allows the ‘copy and paste’ of the ERP environment and cash management structures to the standalone business, which, from a business and IT perspective is normally seen as the only viable route when timelines are short. This also means that there will be very limited opportunity to pursue optimization initiatives unless there is a clear compliance reason to do so.
2. Design the Treasury Target Operating Model for the carve-out company
Based on the guiding project principles, the Treasury Target Operating Model (TTOM) for the carve-out company needs to be designed. In a pure copy and paste scenario the choices that need to be made may be limited, but it is still good practice to explicitly blueprint and sign off the spin off treasury design, ensuring alignment within Treasury and also with other stakeholders and functions.
3. Form a treasury project organization around relevant functional areas
Organizing a project according to various treasury sub-workstreams facilitates the definition of clear project roles and responsibilities, planning and project procedures. As an example, one could consider the following sub-workstreams:
- Project management: Ongoing project and change management and communication with stakeholders/other functions.
- Cash management: Defining transaction banking/cash management requirements, selection of transaction banks, managing know your customer (KYC) procedures and account opening.
- Risk management: Determination of the new financial risk profile, defining risk management policies and procedures, implementing risk management processes.
- Treasury technology: Design and implementation of the spin off treasury systems architecture (ERP, TMS, bank connectivity and other treasury solutions).
- Financing: Design and implementation of intercompany and external funding structures.
Apply the guiding project principles, define the scope and objectives for each of these sub-workstreams and translate these to concrete activities, realistic timelines and ensure sufficient resourcing. Do not overlook the potential need for backfilling of project team members.
4. Ensure frequent cross-functional alignment with the other relevant workstreams (e.g. Finance, Tax, Legal, IT) and manage critical interdependencies
A typical example of a critical interdependency is the timely incorporation of new legal entities by Legal, which Treasury requires for opening of bank accounts, finishing KYC procedures, implementing liquidity structures, and setting up of credit facilities in time. The configuration of treasury systems by IT is critical for Treasury to be able to perform penny testing before go-live. Clear guidance from Tax on how assets and liabilities are going to be transferred to the carved-out company, typically as part of the guiding project principles, is required for Treasury to define and implement the financing structure. From an external stakeholder perspective, involve your key banking relations and system vendors are early as possible to ensure their full support.
5. Keep your approach as practical as possible
In most cases there is no time to target improvements and implement more optimal solutions. It is also a question of who would benefit from these as the intention is to spin-off the business. Focus on practical and effective solutions where you can. The project is already challenging enough, without adding further complications at this point.
Positioning for success
Based on these seemingly straightforward but important principles, a treasury disentanglement becomes manageable and potentially an opportunity to be a best in class workstream in the broader project. Of course, teaming up with the right external partner is also a crucial element for success. Zanders offers a proven track record in global treasury transformation projects, including setting up, merging, relocating and disentangling global treasury organizations.