Transition Services Agreements Often Key to Carve-Out Success

"In a carve-out a company will sell a small stake (usually less than 20%) of a division in an initial public offering, while keeping the rest. The division will then become an independent company with management and a board of directors, but will, in effect, be controlled by the parent. Generally, the company will eventually sell the remaining shares in the open market or otherwise divest itself of the remaining stake at some later date. This is what occurred in the...spin-off of Palm by 3Com.

Carve-outs sound easy in theory; in practice, they can present incredible transition wrinkles...These can range from payroll to employee benefits, IT, procurement, marketing, branding...the list goes on. And then there are legal matters, like taxation, shared intellectual property and whatever else you can think of. The result is it is not always easy, and it can be extremely time-consuming, painstaking and costly (which can lower profits) to separate out the various functions, especially in a computer era, where everything is in one electronic database or another...

The solution to these problems is the "transition service agreement" (TSA). These agreements make the seller responsible for whatever functions the parties deem necessary. Then, during the transitional period, the buyer has to "get its act together," so to speak, in order to be ready to assume these functions when the TSA expires."

Read more in this article from PLI's The Pocket MBA.