Carve-Out vs. Wind-Down: A Guide to a Complex Exit

When an otherwise healthy business has a poorly performing division, sometimes exiting that division is the right choice. Deciding to exit via a carve-out or a wind-down can be the next tough choice leaders have to make. Eric Kaup, chief commercial officer, head of global originations and special counsel at Hilco Global joins the podcast to discuss when exiting is the right choice, how to decide whether to sell or wind-down, and what determines whether a wind-down is a success.

This episode is brought to you by Hilco Global. Learn more at hilcoglobal.com.

Read a transcript of the podcast below.

Middle Market Growth: Welcome to ACG’s Middle Market Growth. I’m Carolyn Vallejo. Companies don’t need to be broadly distressed to face a serious strategic challenge. Sometimes, an otherwise healthy enterprise has a division that is consuming capital, management attention, and operational resources, and traditional sale efforts or an internal shutdown are not viable. In those situations, a carefully structured carve-out or wind-down can protect the core business and create room for renewed growth. Joining us to discuss how leaders can evaluate and execute these complex exits is Eric Kaup, chief commercial officer, head of Hilco Global Originations & Transactions, and special counsel at Hilco Global. Eric, thank you so much for being here.

Eric Kaup: It’s great to be here. Thank you very much.

MMG: Let’s get to know you a little bit first. Tell us about your role at Hilco.

EK: Sure. I’ve been at Hilco for a very long time, longer than I can believe sometimes. I came here in January 2004 as a lawyer, straight from the restructuring group at the Chicago office of Skadden, Arps. I was an in-house lawyer at Hilco until January 2024, so I spent 20 years as an in-house lawyer at Hilco. In January 2024, I took a new role as chief commercial officer. The idea was that, as an in-house lawyer at Hilco, I had seen every transaction from every angle in every business in which Hilco operated. I could go out into the universe and find new places, new kinds of deals, and bigger deals for Hilco, using my unique knowledge of what Hilco can do and what I sometimes describe as “Hilco thinking.”

MMG: Okay, so a lot of experience here, which I’m excited to get into. But before that, just for a little bit of fun, if you had to choose any walk-up song, what would it be?

EK: I would probably say “I Walk the Line” by Johnny Cash.

MMG: That’s a great one. Great choice. All right, let’s get into our main topic today. We are exploring a scenario that we introduced up top: What happens when an otherwise healthy business has a division that is increasingly unhealthy? How can the company respond? Can you kick us off and respond to that scenario?

EK: Of course. I think it’s an interesting topic because, for me, it’s a natural outgrowth of a traditional Hilco transaction. Traditionally, Hilco would buy good assets out of bad companies. Something was not going well at a company, but the assets were still productive and useful. Maybe a company had a nice set of machinery and equipment at a factory, but it completed a systems upgrade, tariffs affected the business, or something else happened, and the company was no longer profitable. The assets, however, were still very valuable. The same thing could be said for a subsidiary or division within a larger, healthy company. The company could be very healthy, but one division may not be performing for a variety of reasons. If you can shut down that division or subsidiary and keep the parent whole, then, in our parlance, you’re achieving a form of addition by subtraction. In that way, “Hilco thinking,” rather than traditional growth thinking, offers a unique perspective on that particular situation.

MMG: Addition by subtraction. I like that. It’s interesting because, if a company identifies a business unit that is increasingly unhealthy, it has a couple of options. It can sell, restructure, separate, or wind down the unit. How should a company decide which direction to take?

EK: In almost every instance, it’s hard for me to say anything other than that the company should try to maximize value, even in the difficult situation of an unprofitable or poorly performing division or subsidiary. In almost every case, companies try to sell the subsidiary. That’s the easy button in these situations. However, I think people often underestimate how difficult it is to sell something that may not be performing well. Usually, companies try a sale process, but it doesn’t work. They may face a reverse purchase price, meaning they have to pay someone to take the business. Then they have the uncomfortable decision of what to do internally. Do they shift a whole group of people and management attention to winding something down? That’s not a traditional management function, and it’s certainly not what people like working on. One of the things companies need to consider when making this decision is opportunity cost. What is the cost of having a group of talented managers spend a lot of time and money doing something they don’t want to do and that isn’t targeted toward the company’s growth?

MMG: It’s interesting that you mentioned how a company may want to sell, assuming that’s the easy button, as you called it, but often finds that it isn’t as easy as it expected. Why can an outside partner sometimes be better positioned to execute either a complex separation or a wind-down than the parent company handling the process itself?

EK: It’s a great observation. A company’s management team is set up to grow that company. That’s its entire focus: growth. That’s what both private and public markets reward. The idea of contracting or shutting something down, rather than selling it, is the antithesis of a management team’s general attitude and skill set. A sale is an acceptable way of moving away from something. Winding it down internally is not an assignment for which people are going to earn a bonus, and it’s not an assignment the market rewards. Hilco, however, has operated in the world of distressed transactions for as long as it has existed. Hilco thinking is about maximizing revenue while eliminating costs, because both factors create value when you’re shutting something down.

MMG: Let’s apply some of the concepts we’ve discussed to a real-world scenario. Tell me about Pitney Bowes’ Global Ecommerce division and your experience there. What challenge was the company facing, and how did Hilco Global structure the solution?

EK: Sure. That’s a great example. Pitney Bowes is a very storied, long-standing public company with a number of great businesses tied to U.S. mail. As a growth opportunity, it set up an e-commerce delivery and returns system that used its many connections with the U.S. Postal Service. The business, however, couldn’t generate enough revenue. It’s a hotly contested market, and the business couldn’t reach a point at which it wasn’t losing upward of $100 million a year. Pitney Bowes initially called us about what I jokingly refer to as a Neanderthal project for Hilco: Could we help with the conveyor systems in its 13 facilities? Of course, we could. That’s a very traditional Hilco assignment. But we were able to work our way up to the C-suite and ask Pitney Bowes, “What are you trying to do here?” The answer was, “We can’t sell this subsidiary without paying a significant reverse purchase price, and we want to shut it down.” We were able to structure a unique transaction that satisfied Pitney Bowes and its stakeholders in a variety of ways.

MMG: It’s impressive because, often, a service provider will do what the client asks. But asking about the context, why the company is looking to do this, and whether there is a better way forward reflects an interesting aspect of Hilco’s approach. How do you measure the success of a wind-down like that? What outcomes were most important to Hilco and Pitney Bowes, especially for the employees, customers, and vendors involved?

EK: That’s right. We try to pitch solutions rather than transactions. When you’re talking with a customer or client about the solution they require, you arrive at a more comprehensive answer. In the Pitney Bowes situation, there were a variety of wins. Through the way we structured the transaction, we bought the subsidiary for $1 and designated it as an unrestricted subsidiary. That meant it was no longer defined as a capital-S “Subsidiary” under the parent company’s indenture, allowing it to enter Chapter 11 without triggering a default under the parent’s indenture. Pitney Bowes had several long-term bonds at favorable rates and didn’t want to renegotiate them or incur the time and increased costs that would have come with doing so. By structuring the transaction as we did, we saved Pitney Bowes significant time and money by avoiding a renegotiation of its indenture. Separately, we were able to communicate with employees and give them enough time to find new jobs. We implemented a healthy and respectful severance program that Pitney Bowes had put in place. Of the roughly 1,500 Pitney Bowes employees, we didn’t receive a single claim in bankruptcy court or otherwise from any of them. We also went through a very complex negotiation with the U.S. Postal Service, which was an important partner to Pitney Bowes because much of its business involves the U.S. mail. We spoke with the Postal Service weekly, reached a point at which it was very comfortable with what happened, and received no response other than, “Thank you very much; this has been handled.” We were also able to complete the wind-down for about half of Pitney Bowes’ internal budget and in roughly two-thirds of the time it had projected. In almost every respect, the situation went very well. What’s interesting, and what I love to discuss while I’m at Hilco, is that Pitney Bowes’ stock price was just under $6 per share when we completed the transaction, and it has been as high as $17 in the last couple of months. It’s rare for Hilco to have a situation in which such a tangible result is so obvious.

MMG: Absolutely. There’s another real-world example I want you to discuss. This one involves a cross-border exit and Design Group Americas, I believe, was the company you were working with. Can you describe the scenario and the new challenges it introduced?

EK: Absolutely. Design Group Americas is interesting because of its cross-border implications and, primarily, the U.K. parent’s unfamiliarity with the U.S. Chapter 11 process. Making sure those stakeholders understood what we were doing, and how they should interact with the Chapter 11 estate, was a useful but challenging exercise. Another aspect of Design Group Americas is that, when a parent is selling a subsidiary or division, it typically tries to sell the company or subsidiary in its entirety. It tries to sell a whole group of assets or a subset of companies. Once you own the subsidiary, however, it’s much easier to sell the subsidiary’s divisions individually. For example, there was no buyer for the entire U.S. business of Design Group Americas. That wasn’t something anyone was interested in. However, we were able to sell six of the nine businesses to individual buyers. That’s a degree of work and focus that you probably can’t achieve unless you bring in a group like Hilco that’s willing to focus on the details.

MMG: That detailed focus is key. Considering the takeaways and lessons from both scenarios, I want to know more about what a successful outcome looks like. You mentioned that execution can come in under budget and ahead of schedule, which is excellent. What other factors contribute to the successful execution of this type of complex transaction? At the same time, what are some of the biggest risks?

EK: That’s a terrific perspective. One of the things that makes Hilco successful in winding down larger groups or organizations is that there are often many employees involved. This isn’t a situation in which the parent is interested in damaging its corporate reputation by failing to treat employees with respect or grace. Hilco typically buys the subsidiary in these situations, so we have corporate governance rights over it. One of the things I have prided myself and Hilco on is making sure we treat employees with respect in every situation. That means giving them as much notice as possible, as early as possible; providing clarity; explaining the severance program; and, perhaps, offering a retention program to keep people around. Giving people the best opportunity to find a new place to work is one of the hallmarks of our success. In addition, as in the Pitney Bowes situation, successfully negotiating an exit with a key stakeholder like the U.S. Postal Service, and preserving that relationship on Pitney Bowes’ behalf, is very important. The parent’s trust that Hilco will cultivate and preserve employee, customer, and stakeholder relationships can be as important when disposing of a subsidiary or division as the dollars and cents.

MMG: Got it. Considering how complex these transactions are and how each scenario can present unique challenges, I imagine that no single factor defines success and that the factors that do define success will look somewhat different for every transaction. Would you agree?

EK: Absolutely. Sometimes companies are very concerned about employees. Sometimes they need to execute a structural transaction that allows them to wind down a subsidiary within the confines of their financing or other arrangements. Every situation is different. One of my big frustrations in life is that you have to kiss a lot of frogs because this isn’t a cookie-cutter solution, and not every situation is the same. I’m out in the universe kissing frogs, trying to find these situations everywhere.

MMG: Kissing frogs. Well, to close us out, Eric, we like to end our podcast conversations with actionable guidance that listeners can apply to their own businesses and scenarios. What advice would you give business leaders who are evaluating an underperforming or noncore business unit today?

EK: The first piece of advice I would give is to set up a parallel wind-down process at the same time you’re launching a sale process for the subsidiary. I’m sure most C-suites are going to launch a sale process, but, if possible, they should also prepare to wind down the subsidiary if the sale process isn’t successful. That probably means devoting one or two people at the company to the wind-down side of the equation. However, that will require far less management time and fewer resources than trying to handle the entire process on your own. In every situation, people face delays. They go through a sale process and, if it doesn’t work, have to pivot back. Weeks or months can pass before they’re able to implement a wind-down process. If you can set up a shadow wind-down process alongside the sale, you can create an almost seamless transition. Either you’re going to sell the business or wind it down, but, in either case, your problem is going to be solved.

MMG: You certainly don’t have to go it alone in these complex situations. All right, that is Eric Kaup, chief commercial officer, head of Hilco Global Originations & Transactions, and special counsel at Hilco Global. Eric, thank you so much for joining us today. It’s been a pleasure.

EK: Thanks, Carolyn. I appreciate it.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

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