Security is another paramount consideration, due to the highly reg- ulated nature of aerospace and defense. Buyers in a carve-out will have to plan carefully around the transfer of not only systems and hardware but, critically, IT talent. (See Q&A on p. 18.) “We can’t just ask about the technology we’re acquiring. We need to ask about who is going to operate it and secure it when the parent is gone,” says Kevin Ellis, executive vice president of private equity and financial services at Thrive, a global technology outsourcing provider. “Critical expertise often sits with the parent and does not transfer with the deal, and that needs to be known up front.” Ellis recommends evaluating leadership capabilities across key IT pillars—governance, cybersecurity, infrastructure, cloud, and ERP, among others—to make sure leaders of those areas are in place for Day 1 as a standalone entity. Buyers will also need to assess the carve-out’s compliance with CMMC—the Cybersecurity Maturity Model Certification, a Department of Defense framework for protecting sensitive infor- mation within the defense supply chain—which is a prerequisite for defense contractors to win federal bids. A carved-out business’s CMMC readiness will not only shore up its cybersecurity capabili- ties, but it could make or break its ability to sell to key customers in the government. Meanwhile, the transition services agreement (TSA), which dictates the support the seller will provide after the transaction closes, should clearly spell out all technical assets, such as the systems, hardware, and data that will transfer as part of the deal. A poorly constructed TSA could find the new company’s employees unable to access critical applications, information, or even email, and threaten the business’s ability to function effectively. The duration of the TSA, its focus areas and cost, and the provisions for unwinding it are all important elements to get right. “Above all, if you’re doing these activities behind the scenes, you’re also trying not to disrupt the business at large,” Adams says. “The more that can happen earlier in the process is really key.” Running behind schedule and having to extend the TSA can be costly, and it can delay the newly carved-out company from pursuing its value creation strategy. We can’t just ask about the technology we’re acquiring. We need to ask about who is going to operate it and secure it when the parent is gone.
approximately $374 million in annual reve- nue, merged with Tinicum portfolio company PennAero. In another example, Coherent Corp. agreed last year to sell its aerospace and defense unit, which designs and manufactures optical and laser sys- tems for defense applications, to private equity firm Advent International for $400 million. In January, the company announced its launch as a standalone entity under the name Attalon, Inc. The rebrand “signals a definitive shift from a subsidiary business unit inside a large com- mercially focused conglomerate, to an agile and purpose-built defense platform,” according to a press release. A well-executed carve-out that becomes a thriv- ing platform is the goal. But these transactions are inherently complex, with added challenges stemming from the nature of the A&D sector. Success requires an appreciation of the risks involved, an experienced team, and a clear vision for the future once the divested asset is fully separated from its parent. Separation Anxiety During any carve-out, buyers must decouple the finance, accounting, and back-office functions of the newly acquired business from its previous owner. A buyer will also want to scrutinize the order backlog and customer base. In the A&D sector, that requires considering the needs and priorities of customers across government agen- cies. “Who’s buying from this business, and then does it align with where we see policies going in the future?” says PwC’s Fiore, citing rearma- ment and reshoring as examples of the sector’s focus areas. Aerospace and defense carve-outs come with nuances stemming from their government customers. Among them is how contracts will transfer when the carve-out is separated, CrossCountry’s Adams says. The carve-out might also require untangling shared costs due to indirect rate structures—expenses not tied to a specific contract or product that are spread across the organization, like general overhead, utilities, or administrative costs—which are common among government contractors.
KEVIN ELLIS | EVP of Private Equity and Financial Services, Thrive
acginsights.org
16
Made with FlippingBook interactive PDF creator