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SAP carve-out: How can you better prepare for future mergers or acquisitions?

The world has recently faced a long list of “new normals”, and divestment is no different for your business. Don’t let a good business decision turn into a messy mix-up of data and information. Executing SAP carve-out smoothly and effectively is critical in the success of a merger or acquisition. M&A’s are driven by the business, with little IT involvement until it is time to deliver; if you have worked in SAP projects before, you know why this may be an issue. Here are a few things you should know to help avoid bumps in the road.

 

What is an SAP carve-out?

In the traditional sense of the word, an SAP carve-out is a partial divestiture within a business unit that a company carries out after selling a portion of their business to an external party. A carve-out is not an implementation project, making it unique compared to your typical SAP projects. They are also highly confidential, with M&A deals behind closed doors in a boardroom. This is due primarily to avoid compliance risks.

There are many different types of SAP carve-outs; some, as described above, are driven by external forces, while others are internally driven. Technically, they are the same, the only differences being timelines and data-specific requirements.

 

Questions to ask before executing a carve-out:

Before going forward with a carve-out, we must answer some questions first.

 

What is being carved out? Whether it’s a legal entity, company codes, a plant, or a complex combination of any of these, it is essential to know exactly what is being carved out.

What is the timeline? Three months is the magic number. A project with a shorter timeline is tough to execute but still doable with the right partner and experience. This is also important to understand because timelines are non-negotiable in externally driven carve-out scenarios.

Is it a share or asset deal? This will determine the IT approach for the carve-out. In an asset deal, the buyer is only responsible for future liabilities from the execution of the agreement. In a share deal, the buyer takes on all past, present and future liabilities with serious data quality implications as they will be responsible for future audits.

Who is bearing the IT costs? Sellers want to reduce the cost for obvious reasons, and buyers want to have the best data quality. These are mutually exclusive, so this conversation needs to be prioritised.

Who is the buyer? If you are selling part of your business to a competitor, you will want to make sure only the necessary data is handed over. You do not want any IP to slip through the cracks accidentally. Handling data becomes critical in this scenario.

What does the future landscape look like? Sometimes we don’t know this, so we need to extract data and hand over flat files to the buyer. Sometimes we need to set up a new system that is handed over.

 

Knowing what questions to answer can help identify potential bottlenecks or hurdles throughout the project to be addressed early. Data ownership is a good example; thus, it is different depending on whether this is a share deal or an asset deal.

 

What makes carve-out projects special?

Now that we know what an SAP carve-out is, let’s spend some time trying to understand what it is about them that makes them so unique compared to other, more traditional SAP projects.

Remember how we mentioned the secretive nature of M&A deals? Well, this is a big deal. The c-suite would like to limit its exposure to compliance risks for starters. To do this, they keep the decision-making process concentrated amongst very few people (think CEO, CFO, M&A specialists and legal – NOT the CIO).

I always tell the story of an IT Director calling me frantically at 5 pm on a Friday, asking me what I knew about SAP carve-outs. It turns out the CFO had just walked into her office with an M&A contract stating they had sold a business unit. It was now up to her to figure out how to separate the systems, segment the data accordingly, and deliver all this within a short 90-day timeframe. That 90-day timeline was what concerned her the most. “This is a must deliver by date. There is no room for failure, or my job is on the line,” she said.

This is, of course, anecdotal, but I’ve had similar conversations in the past to know this was not just a one-off call. M&A’s are 100% business-driven, so no one in the room even thinks twice about IT complexities when discussing multi-million (sometimes multi-billion) dollar mergers or acquisitions. The overall cost of delivering such a project is insignificant compared to the overall deal. This makes it extremely easy to overlook. But without flawless execution, you could potentially run into career-ending penalties. I’m not exaggerating. A 5% late penalty on a $100M deal is $5M – about 10x the cost of the IT portion of the project.

Another unique aspect of carve-outs is that you constantly deal with separate systems: the seller and the buyer. Well, this is not true for ALL carve-outs since some can be strictly internally driven, like system splits or internal restructuring. But when dealing with traditional two-party M&A deals, there will always be two systems (sometimes more in complex scenarios, but this is beside the point). In this case, it is critical to understand a few different things:

 

  • Asset vs Share Deal: This really should be the first question asked as it has huge implications regarding data, hence the level of complexity. As the name implies, a company is selling assets for cash in an asset deal. Think of a logistics provider getting rid of their truck fleet to focus on brokerage or American Airlines selling their regional jet division American Eagle. In this scenario, the buyer is only taking on future liabilities from the execution of the deal. This means there is no need to hand over any historical data necessary to maintain day-to-operations running. On the other hand, in a share deal, the buyer is purchasing stock ownership of the company, so they are taking on the future and past and present liabilities. This means that all relevant transactional and historical data needs to be handed over in future audits. Knowing this early on can give you a huge leg up on understanding planning for the carve-out execution.
  • Who is the buying/selling party: this is a two-way question. The buyer needs to try and understand the seller, and vice versa. Selling to a competitor is entirely different from selling to a business utterly unrelated to what you do. You also need to know as much information as possible about what ERP they are running or how they would like to receive the data. Are we handing over an entire, operational SAP system or just handing over flat files. Sometimes we don’t have visibility into the buyer or dealing with a private equity firm. In this case, we are likely to extract the data in scope and hand over flat files to do as they wish. Simple enough.
  • What exactly is being carved out: this is self-explanatory. Are we carving out an entire company code from an SAP technical perspective or part of a company code? Is it a plant or another type of SAP organisational object? Knowing this becomes the final piece of the puzzle to help you determine the road ahead and start planning for execution.

 

Despite all the unique elements of SAP carve-outs, many tend to be very standardised scenarios for experienced partners working in this space. There are specialised SAP tools to deal with data migrations and deletions and proprietary partner tools offering varying degrees of flexibility in how data can be extracted, mapped and later imported into the target.

Engaging partners with vast M&A experience on both the technical and business sides of the equation will help better prepare for future mergers or acquisitions.

 

SAP carve-out approaches

As we see it at cbs, these four technical approaches come in two flavours: system clone and selective carve-outs. What’s the difference? System clones can be executed with standard SAP technology (basis or SAP LT), whereas selective carve-outs must be performed using specialised software such as the cbs ET Enterprise Transformer.

 

Option 1: Clone and Run

This is the simplest of approaches. It can usually be performed without external help with your in-house basis teams and consists of simply performing a full system copy and running with certain parts of the new system as described by the graphic.

This system copy includes all customising, repository, users, authorisations, and data. This option works well for internally driven carve-outs where the source system isn’t too large, as the hardware would need to be doubled to support the copied system.

 

Option 2: Clone and Delete

Like option one, you start by performing a full system copy. Again, hardware needs to be doubled up to support the full copy of your productive SAP environment.

The next step is to delete obsolete data from the target system using SAP LT or cbs ET tools. As opposed to option one, the result is a system that only includes the data in scope. However, this option is not ideal for customers with large databases. Due to additional hardware costs, licenses for SAP LT software can get expensive as they are based on database size (does not apply to cbs ET). There is also always a chance that not all data and/or customising is deleted correctly and ends up in the hands of a competitor.

 

Option 3: Selective Carve-Out in Empty Shell Copy

This is where it gets interesting. Unlike the first two options, this approach requires an empty shell copy instead of a full system copy. This shell only includes system configuration and customising without any data whatsoever. This has two advantages when compared to the earlier approaches:

  1. The target system does not require as much hardware as the source system due to this being just a “skeleton” copy.
  2. Confidential data that is not in scope will never touch the target system, ensuring no proprietary information exchanges hands.

 

The second step is to get a little more complex and require a standalone blog post to explain, but I’ll try to summarise as best as possible. Employing specialised software (standard SAP tools such as SAP LT are not capable of this), we set selection criteria to extract only the data in scope from the source system and import this into the target system. In this case, considering the target system is configured the same way the source system is, no mapping or data transformation is necessary. Selection criteria can be set based on different parameters such as company codes, plants, profit centres or cost centres, to name the most common ones used. This allows customers to surgically select particular subsets of data to ensure only the necessary data is handed over to the buying party.

 

Option 4: Selective Carve-Out in a new system

This is essentially the same as the shell copy approach, with the added caveat that the target system is different from the source. This could be a separate release, or a system configured differently (i.e. a shell copy of the buying party’s SAP environment, for example) or an SAP S/4HANA system.

The steps are almost the same as above. The only difference is that it needs to be mapped and transformed into the target system structures after extracting data from the source. This mapping and transformation are software-driven and automated, with robust validation features that guarantee data quality and consistency. These last two options lay the foundation for Selective Data Transition to SAP S/4HANA.

Depending on what type of carve-out your organisation is facing, and after answering some of the questions laid above, it becomes clear which one of the options above makes the most sense. Our software ET Enterprise Transformer has extensive analysis functionality to help determine the best way forward.

 

How a selective carve-out works

A selective carve-out migration to SAP S/4HANA allows Company X to mitigate risk and move at the pace of the business by splitting up the otherwise big-bang conversion into multiple steps. Carve out a specific company code or region from the legacy ECC system and covert that into S/4HANA. Use this as a sort of proof-of-concept. Ensure all your processes are working the way they are supposed to before migrating subsequent company codes or regions and merging them into your new S/4HANA environment. The beauty of this approach is that it also allows you to leave redundant data behind, making your new S/4HANA system leaner and free of unnecessary or unused data. The result is the same: start with a single global instance on ECC, end with a single global instance on S/4HANA.

A similar concept can be applied to a smaller company opting for a greenfield implementation. A great example of this is SPS Companies. Once they are done setting up the new greenfield system, carve out whatever data you have decided to be in scope and merge it into your new greenfield system. SPS’ initial situation was not exactly this one. They had just acquired a business in 2018 and decided to use this as a proof-of-concept for SAP S/4HANA instead of integrating it into their ECC environment. After their S/4HANA was configured the way, they wanted it to. They selectively migrated 15 of 30 company codes and only five years’ worth of data into their new environment. No two businesses are the same, so Selective Data Transition is an individual, customised approach to migrate to SAP S/4HANA on your terms.

Learn more on the s.m.a.r.t. Enterprise Transformation Solutions! Also, don’t miss out on our on-demand webinar to explore more about the organisation restructuring with cbs Carve-Out. 

Call us today to schedule a free consultation.

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