Inside a carve-out

Adhering to these leading practices helped Bristol execute its transaction strategy despite the deteriorating economic and financing environment that began in the summer of 2007. Another challenge arose because ConvaTec's support functions were highly interwoven with Bristol's infrastructure, including order-to-cash processes, information systems, accounting and treasury. With operations in more than 40 countries, the global footprint added another layer of complexity.

Simmons credits CEO Jim Cornelius for these successful transactions. His overall corporate strategy translated into a controlled divestiture program whose proceeds can be used to fund biotechnology acquisitions and alliances. Says Simmons, "Our leadership provided a compelling strategy with specific objectives to help motivate and focus the entire organization throughout each transaction."

Divesting a business can be much more difficult than acquiring, particularly today, and takes substantial advance planning. The Bristol-Myers team developed Securities and Exchange Commission-compliant audited financial statements so that ConvaTec's historical performance would be clear to all interested parties. An adviser assembled a defensive due diligence report to help management anticipate bidder issues and prepare the data room.

"Accurate information is the bedrock of a successful divestiture," says Honeywell International Inc.'s global M&A head Anne Madden, who has led many successful corporate carve-outs over the past decade.

The deal teams also laid out an operational road map to determine which capabilities needed to be built or outsourced for a standalone ConvaTec. Tax planning moved in parallel to reoptimize Bristol-Myers' tax strategy post-closing and to craft a tax-efficient framework for the carved-out business.

Bristol-Myers' divestiture planning involved ConvaTec leadership from the beginning. Simmons recognized that "the management team plays several critical roles in a deal: helping prepare and package the information, communicating a value proposition to each bidder and maintaining operating performance throughout the sale process."

Because carve-outs require contributions from every part of the organization, transaction leaders have to rely on team members over whom they have little formal authority. Senior Bristol-Myers management made a successful ConvaTec closing one of its top priorities, which encouraged strong teaming within and between workstreams throughout the deal.

The external deal team included investment bankers, attorneys, auditors and an adviser to support project management, carve-out financials preparation, seller due diligence, tax planning and operational separation.

As Simmons puts it, "Preparation preserves value." Bristol-Myers was "value-conscious" as well as cost-conscious. "We are always working against challenging timelines, and the investment in internal and external resources for transactions of this type is, by definition, considerable. That investment was an important part of delivering results."

While many companies honed their acquisition skills in recent years, very few built rigorous divestiture processes. What's needed is a clear transaction strategy, visible leadership support, thorough planning and sustained teamwork for sell-side success. The ConvaTec case study demonstrates how Bristol-Myers has been successful in the art of the carve-out.

Jeffrey Greene has leadership roles for the divestiture advisory and biopharma­ceuticals sectors in Ernst & Young LLP's transaction advisory services practice.