For as rife with complexity that mergers, acquisitions, and divestitures are, Transition Service Agreements (TSAs) are just one more hurdle for buyers and sellers to overcome – or rather, several hurdles. TSAs are essential components for ensuring that an M&A or divestiture deal is closed according to both parties’ expectations. Doing so means that buyer and seller need to agree upon key considerations of the TSA going into it – otherwise they’re liable to get tripped up on obstacles all the way to closing.
The need for comprehensive TSAs has surprisingly become even more acute this year, in the wake of Covid-19. At first glance, a global pandemic and subsequent recession may not sound like conditions ripe for major organizational transformations like mergers, acquisitions and divestitures. But if an economic slump was triggering a business to underperform, or a parent organization wanted to streamline and consolidate its businesses, then M&A and divestitures allow them to either consolidate those business or extricate from underperforming ones in order to main their own financial health in a turbulent economy. As Covid makes these activities more vital to the health of a business, TSAs in turn become integral to making sure that M&A and divestitures are executed as expected and needed.
TSAs aren’t just administrative procedures; they’re essential to both parties getting the strategic value they expect from the deal. So it’s critical to get them right. That means both clearly defining the ins and outs of the TSA from the start, and leveraging help from the right partner to execute successful, timely data migrations or carve-outs in line with TSA requirements – and avert the regulatory hurdles, or consequences for non-compliance, that come with those requirements.
Key considerations for defining the TSA
As the TSA will determine all the fine details – from deliverables to timeline to exit strategy – defining it so that it’s easily understood and mutually agreed upon by both parties is of absolute importance.
Undergirding that are some key considerations that any company undergoing an M&A or divestiture needs to commit to as part of defining their TSA:
- Clearly establish the scope, duration and pricing of the TSA so that both sides know what the deal encompasses, how long it will last and what it will cost – and ensure there are no surprises coming from either side.
- Create dedicated teams or workflows that are specifically set up to ensure both parties are complying with TSA requirements, and can conduct reviews and audits of the process as necessary to ensure TSA compliance.
- Define expected performance requirements for both parties under the TSA and also the consequences for non-compliance. Everyone should know the rules and the risks involved.
- Make sure you’re documenting the true costs of TSA services as you go, so that you don’t end up accumulating unnecessary expenses by the end of the process.
- Prioritize attention to data privacy and security concerns. This is particularly acute for data sets that are either being migrated from newly acquired companies, or carved out from divested companies, to ensure data access privileges are not being freely shared to people who shouldn’t have them.
And to that last point, clearly identifying the shared systems environments that need to be targeted for a data migration or carve out will be crucial.
The complexity of executing data migrations and carve-outs
Migrating or carving out data sets is required under a TSA. But it’s up to the parties involved to create a TSA that allows for the proper amount of time needed to fully execute, from start to finish, a controlled migration of one party’s services, systems and historical data sets, to the other.
This can be a complex process, involving precise identification of the relevant systems and services to be migrated or carved out – everything from ERP platforms like SAP and payment processing systems, to databases, web infrastructure and third-party vendor interfaces. Accurately identifying these systems is key to both ensuring that the newly merged or divested companies both have the appropriate data sets and access that they’re entitled to, and also that the data migration or carve-out has been executed in compliance with pre-defined TSA parameters.
And there are many other elements to consider too:
- Specific platforms (e.g. does one company use SAP for their ERP platform, but the other company uses another vendor?)
- Internally developed vs. externally licensed systems
- Dedicated vs. shared system environments (important for targeting which systems may require migration or carve-out)
- Specific data sets or records that may not be practically suited for isolation as part of a migration or carve-out.
Analyzing the process from these angles is essential to creating a full and accurate portrait of both the underlying IT infrastructure to target for the migration or carve-out, as well as the costs of actually getting the job done.
For as complex and potentially fraught with risk that carrying out a data migration or carve-out (and in compliance with TSA parameters) can be, the job becomes much less of a burden when companies align themselves with a partner specialized in doing exactly this kind of work.
An effective partner should be able to identify potential overlaps or gaps in migrated/carved-out capabilities and systems, and in the event of overlaps, determine whether or not the overlapping item should be retained. They should also be able to pinpoint potential incompatibilities between systems, incurred technical debt, and other migration errors that may extend downtime periods or delay an expected go-live date.
Bringing in automated and software-driven approaches to data migrations and carve-outs can also help ensure that the above processes are not only executed as quickly, simply and cost-efficiently as possible, but are done so in line with the M&A/divestiture timeline and compliance with TSA requirements.
Violating TSA compliance because of a failure to adequately meet requirements around data migrations or carve-outs can result in seriously disruptive and unnecessary consequences that can derail your M&A and divestiture plans. Amid a global economy rocked by Covid, and an increasing need for businesses to ramp up M&A or divestiture activity simply to survive, complying with TSAs has become particularly essential, and those consequences for failing to comply with them more acute. But those consequences are also entirely preventable. Having the right partner and the right tools at the table with you can help ensure that.
Roger Elwell is a vice president of strategic partners and alliances at SNP.