Key Takeaways

  • Cooley partner Danielle Fortier notes that persistent valuation gaps between buyers and sellers have replaced the whole-company acquisitions common during 2020 with targeted asset carve-outs.
  • When broad enterprise auctions stall due to price mismatches, prospective acquirers approach conglomerates directly to carve out single high-performing business units.
  • Sellers accept these partial exits to generate liquidity for core business units without taking portfolio-wide discounts on underperforming segments.
  • Operational separation assumptions routinely fail because shared vendor contracts, unified IT infrastructure, and artificial intelligence source code exposure create deep seller entanglements.
  • Establishing transition service agreement (TSA) duration and pricing before signing the letter of intent protects buyers against open-ended operational subsidies to sellers.

The Mechanics of the Valuation Standoff

During the buyout frenzy of 2020, private equity sponsors bought entire corporate structures at peak multiples. Higher capital costs and diverging price expectations have frozen broad auction processes. Sellers still anchor on peak valuations for their consolidated balance sheets. Buyers refuse to pay blanket enterprise multiples for mixed bags of assets.

Fortier observes that this deadlock creates an opening for bilateral, buyer-initiated carve-outs. When an enterprise auction stalls, buyers return with a narrower proposal. As Fortier puts it: “Instead of kind of buying the whole thing which maybe would have happened more in sort of like the heady M&A days of 2020, we are seeing more and more buyers say, 'Well actually what I really love about this business is this piece of it, and I am willing to pay a multiple that meets your expectations for that, but I think that this other piece maybe is overvalued.'”

This dynamic gives sellers an off-ramp. Instead of pulling an asset from the market in defeat, a parent corporation can spin out a high-margin unit, bank immediate liquidity, and funnel capital back into core operations. Buyers avoid paying enterprise multiples on mediocre corporate subsidiaries while acquiring the exact commercial engine they want.

The Fallacy of the Clean Separation

Acquiring a clean piece of a messy enterprise sounds tidy on an investment memo. The execution is rarely so simple. Corporate parents routinely pitch target units as standalone operations that can split away without friction. Fortier warns buyers to discard that assumption immediately.

“The carveouts can vary widely in terms of how integrated the business is with the business that the seller is retaining,” Fortier explains. “There is almost always some level of interconnectedness that you have to undo in a carveout.”

The hardest break points are operational rather than legal. Shared enterprise software contracts, overlapping vendor agreements, and centralized back-office systems tie the target to the seller. In software acquisitions, artificial intelligence tools have created new risks around proprietary source code, where training data and codebases overlap across business lines. If buyers wait until confirmatory diligence to price transition service agreements, the seller holds the upper hand. Scoping shared systems and fixing TSA durations before executing the letter of intent prevents the buyer from funding the parent company's overhead long after closing.

Why It Matters

Carve-outs born from broken auctions signal that PE sponsors are finding liquidity through structural engineering rather than waiting for market valuations to reset. When enterprise auctions freeze, value extraction shifts from financial engineering to operational uncoupling. Sponsors who build separation mechanics and TSA economics directly into pre-LOI negotiations can access prime corporate assets at defensible entry multiples.