Stranded Cost Elimination in M&A Carve-Outs: How Sellers Protect Value and Strengthen RemainCo
A successful carve-out is often judged by the purchase price, the strategic rationale for the transaction, and the buyer’s ability to operate the acquired business independently. For the seller, however, another question can be just as important: what happens to the cost base that remains after the business has left? This question sits at the heart of stranded costs, and it can materially influence whether a divestiture creates the expected value for the company that remains.
Before a transaction, businesses frequently share employees, technology platforms, facilities, procurement arrangements, corporate functions, and other infrastructure with the rest of the group. When one business is sold, the buyer takes responsibility for the activities that move with the business, but the seller does not necessarily lose the associated costs at the same time. A shared-services organization may suddenly have excess capacity, a technology contract may still cover users who have moved to the buyer, or a corporate function may retain resources that were justified only by the scale of the pre-transaction organization. The seller can therefore end up with a smaller business and a cost structure designed for a larger one.
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