Managing Divestitures Through TSAs
With deal volume rising significantly in the post pandemic recovery period, organisations in India have been actively looking to unlock value and free up cash. Divestiture deal value saw a near 20 percent[1] annual increase, driven by organisations’ desire to exit non-core business lines or realign strategy to achieve higher growth. While divestiture deals are on the rise, delivering them successfully is often a different proposition.
With a view to undertake divestitures in a shorter timeframe while containing some of the inherent risks, companies often employ instruments known as Transition Service Agreements (TSAs). These are short-term agreements that allow a divested entity to continue availing key services from the divesting entity, providing it more time to disentangle and eliminate dependencies.
This article examines some key use cases for TSAs and identifies reasons they are preferred despite adding to the cost burden for the divested entity.
The first category of these use cases focuses on maintaining business momentum without any significant impact on business-as-usual. During divestitures, a company management responds to both internal and external changes and that leaves it with a lower bandwidth. TSAs allow the management to focus on significant issues and opportunities without any disruption. These agreements also enable the management to close the transaction faster, without having to try to fit long lead time items within the deal timeframe. For example, a leading global automotive company carving out its domestic business had to address multiple internal and external dependencies. To avoid risks, TSAs were scoped out and a strong governance was put in place to address the complexities in transferring the business unit within a compressed timeframe. This accelerated the divestment process, thereby reducing the deal closure time without affecting regular operations for critical activities.
The second category of use cases focuses on disentangling assets with various functional and operational dependencies between the divesting entity and the divested entity. Due to various complexities, the divesting organisation’s support is desirable even after closing a transaction. In the absence of TSAs, such disentanglement can be time consuming as well as lead to potential business risk and value loss. For example, a leading Indian credit card company separating from its joint venture partner faced risks due to most of its technology applications and infrastructure being provided by the partner. More than 100 IT TSAs were drafted to help address continuity of the IT landscape, allowing the successful disentanglement through meticulous planning around platform separation and subsequent migration to the divested entity.
The third category focuses on minimising risks of sharing data with the divested entity while ensuring compliance with local and country-level regulations. In multiple countries, third parties are subject to data protection laws and require consent for access to Personally Identifiable Information (PII). Well-crafted TSAs can safeguard entities through confidentiality provisions, which detail out the requirements around data protection, collection, usage, and disclosure. For example, a UK-based pharmaceutical company selling its consumer health care business to an Indian player needed to extend various customer-facing websites and applications with sensitive consumer data to the divested entity until migration was completed. Comprehensively crafted TSAs enabled the seller to transfer the necessary data to the buyer securely, ensuring the entities remained compliant to country-level data protection requirements.
As critical as well-crafted and executed TSAs can be, putting in place a well-defined TSA exit plan is perhaps equally critical. Inadequate attention to this area can lead to inefficiencies, cost overruns for the divested entity, and likelihood of stranded costs for the divesting entity. At the time of signing up, the divested entity must think through the levers that will be used to replace TSAs. These must then be meticulously acted upon such that both the divesting and divested entities have visibility of the progress being made and exit-related actions can be triggered well in time. An effective TSA governance mechanism can help address such issues, helping the management to coordinate across various dependent workstreams.
To sum up, TSAs are powerful instruments that can be used to address various complexities that can arise during divestitures. The leaders of a company undergoing a divestiture must develop a TSA strategy early in the divestiture process. The strategy should focus on addressing critical dependency areas, thus helping both the divesting and divested entities to benefit from a seamless transition and maintain business momentum.
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