Carve-out, sale, acquisition and SAP systems

In the article, we will deal with typical project scenarios in SAP systems for business transformations involving divestiture/carve-out of a part of an organization and merger/acquisition (merging two organizations into one).

Let’s consider what is the basis of a successful transformation. From the business side, business transformations are … a standard management tool. However, to make them successful, early involvement of IT departments is necessary so that in addition to planning for the business change, they also strategically plan to change the solutions that support that change.

The first of the foundations of a carve-out or merger is due diligence (IT audit). And the first question a company using SAP solutions should ask itself is: what is the IT architecture in which we will conduct the transformation? Do both companies involved have a SAP system, or only one of them? This is followed by an inventory of the remaining (non-ERP) applications, the hardware, system, database and network infrastructure, and the IT department organization. The final element of due diligence will be organizational culture and current operating activities, including ongoing and planned projects, the priorities of which may change in the new context.

The second pillar is transformation planning, which should be synchronized with business change planning. Establish a strategy for the planned change, identify the people and resources who will implement and support it. The key – as always with change – will be communication and escalation paths. An efficient and appropriate flow of information will reduce fear of the unknown or potential friction. It is also important to harmonize the needs of different units or business departments, and in case of conflicts, to make and communicate final decisions. It is important, especially in the case of complex international transformation projects, to identify all, including local needs and conditions.

The third and final foundation of a successful transformation is the involvement of all affected parties – both company departments (business and IT) and external partners (solution and service providers). Finally, an important element is to engage an experienced partner who understands the challenges of transformation.

Sales and carve-out

The most important reason for projects resulting from the sale and carving-out of parts of the business is the desire to focus on the core elements of the business and the conscious, controlled carve-outs or divestiture of those elements that are not critical to the company. Their purpose is to carve-out an organized part of the organization from the current structures into separate structures (e.g. establishing a new company code dedicated to a specific production or service activity), and/or into a separate system, in order to prepare such a company for future sale.

Regardless of the carve-out scenario adopted, the key is to minimize business continuity disruption for the buyer and the seller. Also important are issues of intellectual property and access to knowledge (know-how) and historical data that may no longer be owned by the divested company in the event of a divestiture. This aspect should be regulated within the contract. It is also an opportunity to rationalize the portfolio of applications integrated into the ERP system.

To ensure a smooth transition from an organization subject to carve-out to a carved-out organization, you need to ensure that you have the right strategy. Key issues include:

• specify the organizational scope (e.g., group of companies, company/company code, plant);
• identifying the source and target IT architecture, e.g. using the infrastructure of the carving-out or acquiring company (in the context of mergers and acquisitions), as well as setting up a new environment for the carved-out entity;
• selecting a carve-out and integration strategy for the “carved-out” entity, i.e., how we will “take out" the divested entity from the current systems;
• time constraints determined by business or regulatory conditions,
• period and rules of access to historical data of the carved-out entity.

We present possible scenarios for the project of carving-out.

SAP re-implementation, i.e. implementation from scratch in the old-new entity (greenfield). The advantages of this solution include the choice of implemented processes and the way they are modelled. We can leverage best practices and lessons learned from previous implementations and work with the system.

A specific carve-out scenario is re-implementation based on an existing system pattern. In this case, we implement a new system for a carved-out entity based on an existing “template" (e.g., existing in an enterprise system for a particular type of business).

Another possibility is a carve-out project, where we “remove" the processes and data of the carved-out entity from the source system and move them to the new solution. In addition to the technical dimension, the leading dimension is, as usual, the business dimension, in which the functions and data that will be “deleted" are defined. The advantage of this approach is that, from the perspective of the new organization, it works as if it were in the “old" system. The disadvantage is the complexity of separating the data – which is a major challenge in the project.

Acquisition and merger

The second group of transformation projects are undertakings resulting from the decision to merge two organizations into one. Their goal is to combine both organizations in a business and system way so that, after the merger, they will constitute one jointly operating organism. This is an opportunity for faster growth and to combine the knowledge and resources of both entities, their customers or market share.

The aim of the project will be primarily to unify the activities of the merged entity in homogeneous business areas (e.g. finance and controlling, sales) and to use the acquired potential to service heterogeneous areas, where the greatest added value of the company merger may also lie.

As with carve-out projects, you need to have an appropriate organizational change management strategy to ensure a smooth transition from an organization subject to carve-out to a carved-out organization. Key issues include:

• Identify the extent of divergence, i.e., a catalogue of issues (at the process or systems level) where organizations differ. This scope will be the working list for the merger project;
• Establishing the target IT architecture. This can include using the infrastructure of one organization or the other, as well as setting up an entirely new environment for the start-up company. Much of the information here will be provided by due diligence;
• Selecting an integration strategy for the merging entities, i.e., how to connect the two companies’ systems;
• Time constraints, determined by business or regulatory considerations.

What are the possible scenarios for a merger/acquisition project? Above all, it is crucial whether one of the companies involved in the merger already has SAP and whether this solution is seen as a target for the combined organization. What is important here is the balance of power between the entities involved in the merger, i.e., whether the entities are merging on an equal basis or whether the companies are acting from the position of the buying and being bought organization. We present the most common scenarios.

Roll-in/Rollout, i.e. “pull-in" of the bought organization to the buyer’s SAP system. A project implemented as a classic roll-out, with the new entity being the entity acquired in the merger/acquisition project.

Roll-in/Rollout, or “pull-in" of the buying organization onto the SAP system of the bought organization. Project analogous to the first case, with the “owner" of the system being the organization being acquired in the merger/acquisition process.

Reimplementation, or implementation from scratch implemented for both units (greenfield). The advantages of this solution include the choice of implemented processes and the way they are modelled (no “historical loads").

Reimplementation based on an existing system template. We implement a new system for the combined entities, but we do not start from scratch, but from an existing “template" (e.g., existing in an enterprise system).

A final scenario, sometimes chosen by organizations, is integration at the reporting level (e.g., as part of consolidation) but outside of SAP ERP (e.g., in SAP BI). This is a rare approach, due to the limited synergies from merging the two companies (e.g., process alignment, inter-company), dictated by lack of time or resources to more fully unify solutions.

The past year, like no other in recent years, has reminded us that the only constant and certain thing in life is change. Local and global events – like the COVID-19 pandemic – imply business and market changes Change is risk. And there are two active ways to respond to risk: avoidance and counteraction. Good planning for carving-out and selling part of a business or acquiring a business unit and merging with it is an opportunity. Its use also depends on a well-thought-out impact of business decisions on the IT environments supporting business.