Successful Carve-outs in Challenging Times

March 21, 2024

Delivering deals during challenging times exposes both buyer and seller to a higher risk of value loss. Risks are amplified during carve-out processes, where the potential for value erosion is that much higher. However, during these times, businesses not typically considered for divestment may come to market, presenting opportunities for buyers to acquire strong businesses, often at a discount in an accelerated timeline.

In our paper, Successful Carve-outs in Challenging Times, we explore the trends of carve-out deals in recent years, diving into sector and geographical analysis, before outlining how buyers and sellers can maximize value in these situations. Be sure to download our report to learn how to tackle carve-out transactions, and contact us should you wish to find out more.

Current M&A market landscape

In 2023, M&A activity saw a notable decline compared to the previous year, resembling levels seen in mid-2021. Despite this, Q4 2023 still showed a 25% increase over Q4 2019, offering assurance of ongoing deal opportunities despite market challenges.

EBITDA multiples reflect heightened M&A interest, with investor eagerness and low capital costs inflating multiples. However, in 2023, multiples decreased by 9% from 2022, resembling levels last seen in 2016. This presents opportunities for confident bidders to acquire assets at reduced prices.

Divestments have become increasingly prominent in M&A, constituting around a quarter of all deals in 2023, a significant shift from historical percentages. While traditionally viewed as complex, vendors are now better prepared, attracting more bidders.

Despite divestments typically carrying lower EBITDA multiples due to added complexity, market downturns can reverse this trend. Savvy buyers seizing opportunities during such times may secure valuable assets at lower costs, as evidenced by trends in 2009 and 2021. In 2023, the contrast in median divestment multiples compared to non-divestment deals was particularly pronounced, signaling a promising landscape for strategic acquisitions.

How do carve-outs this vary by sector?

The focus on carve-outs by sector varies heavily across the M&A landscape, and the number of divestment deals is only one part of the picture. Whilst the Technology sector has the most divestment deals overall (aggregated over 2022-23), it also has the smallest percentage of carve-outs when compared to total deal volume (14%).

The conditions for carve-out activity may present themselves more readily in certain sectors. Therefore, to assess the prevalence of carve-out activity within a certain sector, one must also consider the percentage of divestment deals vs total deal volume within said sector.

How do carve-outs vary by country?

eveloped M&A markets, which have the skills, confidence and track record of delivering carve-outs, are more likely to venture into them. For those nations where the M&A market is particularly competitive, carve-out strategies also appear to be deployed by investors seeking to again an edge.

What makes carve-outs in challenging times, different?

Carve-out programmes increase complexity for business and delivery teams and lead to nervousness during ownership transitions despite careful planning. A well-structured programme mitigates risk and ensures business continuity on Day 1. While some separations are straightforward, many require extended transition support that can take months or even years. Executing separation programmes in uncertain times increases risks due to unstable operating environments and requires a greater focus on details with limited time and vendor involvement.

How can Eight Advisory help in successful carve-outs?

Our methodology for accelerated carve-out centers around getting things right first time and early, enabling parties to move at pace and capture and protect value. This approach is relevant to both buyers and sellers in carve-out situations.

In our latest whitepaper we explore how buyers and sellers can facilitate successful carve-outs in 2024, and what risks lie ahead for dealmakers of these deals.

Download our whitepaper o learn more and see how we help you maximise value and minimise disruption to make your carve-out a success.

Enjoy the read: Succesfull Carve-Outs in Uncertain Times