Cost Considerations in M&A Deals: Stranded Costs, TSA Fees, and Standalone Costs

In the world of mergers and acquisitions (M&A), cost considerations play a crucial role in ensuring a seamless process. Stranded costs, Transition Services Agreement (TSA) fees, and standalone costs are pivotal financial elements that, if overlooked, can lead to significant consequences both during and beyond the span of the TSAs. Before delving into recent insights from these cost elements, it is essential to define what each term entails and why they are critical components of any M&A transaction.

What are stranded costs, TSA fees, and standalone costs?

Stranded Costs:

Often an afterthought in strategic divestitures, stranded costs are recurring operating expenses left with the seller post-sale when a business asset is no longer part of their company—a silent killer in financial analysis that demands attention during divestiture planning. For a successful separation, each business function should conduct a stranded cost analysis and create action plans aimed at post-separation operational targets. Within IT, primary focus areas include:

  • Applications
  • Infrastructure & Depreciation
  • End-User Services (EUS)
  • Resources
  • Transformation Initiatives
  • Commercial Agreements with suppliers

Find out more details on where to perform standard cost analysis in a recent Liberty Advisor Group thought piece.

TSA and Fees:

A Transition Services Agreement is an arrangement between the buyer and seller where the seller agrees to provide essential services to the buyer at a pre-agreed price. This often includes vendor support agreements and end-user device management. A TSA is crucial for a buyer who may not have the immediate capability to manage the newly acquired operations, thereby ensuring a smoother transition and continuity.

Find out more about the key elements of a TSA.

Standalone Costs:

These are the costs of running a divested business unit independently after separation. Both the buyer and the seller will encounter these costs, which reflect the new operational cost structures of their respective organizations. Understanding these costs is vital for streamlining operations from Day One post-deal and setting the stage for successful integration.

Find out more on how to accurately plan for M&A costs in your next due diligence.

Key Cost Considerations from Our Recent Experience

Through working on numerous M&A engagements every year, Liberty Advisor Group has gathered some valuable insights on crafting TSA agreements and its associated fees.

  • Ensure clarity around the methodology for constructing TSA fees. TSA fee construction must be clearly defined. For example, TSA fees should be created as the cost of providing TSA services.
  • Create an allocation model for IT’s accounting and finance functions. This will determine IT cost allocations as part of TSA fee construction.
  • Align vendor contracts associated with TSA services to TSA durations and end dates. Failure to do so can result in being stuck with vendor contracts and services that are not commensurate with the remaining service levels post-TSA. This creates stranded cost situations that cannot be clawed back or right-sized until the contract is renewed.
  • Ensure the development of a formal project to remediate stranded costs for any organization or business unit that has undergone years of M&A activity. This is necessary to avoid losing recoverable dollars in year-over-year budgets.
  • Implementing a structured IT vendor management process can reduce costs by organizing vendor information, contracts, renewals, and value.
  • To identify areas of cost reduction and their business impacts, create a comprehensive IT budget that includes operational expenses, business applications, ERP, etc.
  • Make sure to obtain the agreement and support of IT leaders for any cost-saving initiatives.

Liberty Advisor Group: Stranded Cost Case Study

A recent engagement with Liberty Advisor Group entailed advising a client on stranded cost analysis, strategy, and remediation execution, specifically to identify and mitigate stranded costs in their IT budget. This partnership resulted in the development of a robust vendor recovery program to reduce IT spend, and a reformed IT budgeting process for the executive team. The client’s Annual Operating Plan (AOP) was shaped through this collaboration, identifying $15M in potential savings, with $12.5M successfully recovered.

Find out more about this related M&A carveout engagement.

About Liberty Advisor Group

Liberty Advisor Group, a premier business and technology consulting firm, specializes in providing tailored strategies to navigate the complex landscapes of M&A deals. By focusing on cost considerations and operational efficiencies, Liberty equips clients with the necessary tools and insights to maximize value and ensure a seamless transition through all stages of a transaction.

Mergers and acquisitions deals require a careful balance between costs and benefits. Stranded costs, TSA fees, and standalone costs must be meticulously analyzed and managed to prevent any missteps that could lead to financial imbalance. Through strategic planning, detailed analysis, and a robust understanding of these costs, organizations can position themselves to execute successful transactions that are beneficial to all parties involved.

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