Approaching a business unit head to acquire their division is like "inviting the turkey to Christmas." They will naturally be defensive about their role and business. The correct strategy for a proactive approach is to engage their superiors, who have a broader strategic perspective on whether the unit is core to the parent company.
An M&A lead's role isn't to be an expert in tax or IT, but to assemble specialists. Like a general contractor, they must know enough to spot issues ('wires sticking out of the wall') and deploy the right expert, synthesizing findings to assess valuation and integration hurdles.
A process where the deal team hands off a signed transaction to a separate integration team is flawed. State Street integrates business and integration experts into the deal team from the start. This ensures diligence is informed by integration realities, timelines are realistic, and synergy assumptions in the deal model are achievable.
When sourcing a carve-out proactively, the seller may not be fully committed. State Street recommends the seller commission a sell-side Quality of Earnings (QofE) report. Their willingness to invest in this serves as a strong signal of their seriousness and provides a more accurate financial baseline, reducing the risk of surprises during diligence.
Experienced acquirers use templates for carve-outs, but it's a misconception they are fully scalable. Keith Crawford of State Street cautions that the final 20%—a company's unique operational setup and internal processes—requires custom analysis to avoid relying on past assumptions and missing deal-specific risks.
A major hidden cost in carve-outs is vendor contract renegotiation, as change-of-control clauses can trigger price hikes. State Street mitigates this by stating in its LOI that the valuation assumes all third-party contracts remain at or near historical costs. This forces the issue early and protects the buyer's valuation model.
A one-size-fits-all integration can destroy the culture that made an acquisition valuable. When State Street acquired software firm CRD, it intentionally broke from its standard process, allowing CRD to keep its brand identity, facilities, and even email domain to preserve its creative culture and retain key talent.
State Street's Keith Crawford identifies three primary reasons to walk away from a carve-out. First is an uncertain perimeter—not knowing exactly what assets you're buying. Second is ambiguity around which employees are in scope. Third is discovering you cannot perform the core service on day one due to a missed dependency.