Former Caterpillar Exec, Steve Larson, Drops the Mic During a Carve-Out Q&A
An uninterrupted, 35-year ascent within a single organization is practically unheard of these days. Unless you’re Steve Larson, in which case it is no exaggeration. Steve’s career with Caterpillar was impressive. Prior to retiring in 2014, he held increasingly senior executive leadership positions, including Vice President of Caterpillar Inc. and President of Caterpillar Logistics Inc., a $2B wholly-owned subsidiary.
In 2012, 65% of Caterpillar Logistics was sold to private equity powerhouse Platinum Equity, who rebranded the carve-out as Neovia Logistics. Steve was responsible for managing this carve-out, and after retiring from Caterpillar, Steve was asked by Platinum Equity to assume an Interim CEO role at Neovia, which he did from 2015-2016.
We were lucky enough to catch-up with Steve to discuss his carve-out experience.
Will you share some key carve-out success factors? What recommendations/tips might you share with executives responsible for a private equity carve-out?
There are several factors to consider to ensure success in a carve-out.
First, the executive office or board needs to select a highly qualified leader to manage the carve-out. If this is you, plan on delegating some of your day-to-day responsibilities to ensure that you can allocate the necessary effort to this complex endeavour. It needs to be your top priority if it is going to be done successfully.
Second, you need skilled project management resources at your disposal to support the effort. There are thousands of action items in a carve-out effort, and project management is essential to ensure issues are addressed on-time and in the correct sequence. Accountable individuals from each functional area also need to be identified, and there must be absolute clarity relative to roles and responsibilities.
Third, a detailed inventory of all services provided by various corporate functions should be completed. The accounting, tax, treasury, IT, legal and HR areas are all functions that provide significant levels of service to individual business units. Many of these services are taken for granted and the level of resources required to replicate these functions can be grossly underestimated. Particular attention needs to be paid to IT systems and processes to make sure you don’t miss anything that could impact your customers. The legal entity structures that enable the business to operate in different countries (if that is the case) also need careful consideration. Often the legal entity structure will stay with the company divesting the business, and therefore that legal entity structure would have to be replicated for the carve-out to truly stand on its own.
Fourth, unless the divesting company has internal resources experienced in carve-outs, it is important to consider engaging an outside firm that has a successful track record in this area. The complexity of the task is sometimes not appreciated, and it certainly makes sense to engage a professional services firm if you don’t have experience within your own organization.
Fifth, and probably most importantly, there must be a robust communication and change management plan in place. Employees, customers and suppliers must be continuously communicated to with a high level of transparency and consistency.
What are some likely cultural challenges one will encounter during a carve-out?
One significant cultural challenge is that the employees who are part of the carve-out often would prefer to stay with the business that is actually doing the divesting. It is critical to manage this resistance through robust communication. Being open, honest, and transparent - while repeating key messages with consistency and regularity, especially during those early weeks and months - is vital. It is important to give employees a forum to ask their questions and get answers, whether that be a town hall or all employee meeting.
Another challenge is ensuring successful integration of employees into the carve-out. For this to happen the acquiring side needs to have a robust integration plan in place and the transition period needs to be well managed. Employees of the acquired business need to successfully adapt to the new environment.
What are the most important carve-out risks and mitigations?
It is important to keep critical employees on board and engaged throughout the carve-out. This reinforces the criticality of the change management process and communication plan. A significant loss of key employees would reduce the value of the business.
Negative customer and supplier perceptions introduce further risks. The unknowns and concerns associated with the change need to be mitigated through the communication plan, which will be unique for customers and suppliers as their questions and concerns will be different.
Additionally, it must be understood that some of the services provided by the divesting company are likely going to need to continue after the deal is consummated. Depending on the timeline of the deal, it may not be possible to truly stand 100% alone by the required date. Transitional service agreements with the divesting business are often required to ensure the divested business can function properly. These agreements need to be negotiated well in advance of the actual handover of the business.
Lastly, is easy to vastly underestimate the amount of effort and resources required for a successful carve-out. Engaging an expert, who has been through it before, and understands the complexity of a carve-out should be strongly considered.