As part of the Lehman Bros Barclays Capital Asset Purchase Agreement between Lehman Brothers and Barclays Capital, through which Barclays agreed to acquire virtually all of Lehman’s North American assets along with its headquarters building and two data centers, Lehman Brothers and Barclays Capital entered into a Transition Services Agreement. What is a transition services agreement, and what is it used for?
Transition services agreements are legal agreements most often associated with asset purchase agreements involving the divestiture of a significant portion of a business. In a transition services agreement, the seller agrees to provide certain services to support the acquired business for a period of time in return for compensation. I’ve linked to a helpful article from Deloitte Consulting, in which the authors mention that “TSAs (transition services agreements) are most often used in carve-outs where the buyer lacks the necessary information technology (IT) capabilities or capacity to support the business on its own. For instance, many Private Equity (PE) firms rely on TSAs until they can identify and engage an IT outsourcing vendor. TSAs are also often necessary when the deal closes faster than the buyer’s IT organization can respond.”
There are a number of advantages in entering into transition services agreements alongside asset purchase agreements, including reducing transition costs and providing for a faster close, allowing for a cleaner break for the divested business, and potentially giving the acquirer an opportunity to more effectively assimilate the acquired business.
Disadvantages of poorly conceived and executed transition services agreements include a drawn out transition process, distractions for the seller as it has to continue to provide support to an outside entity in potentially unfamiliar ways, and the possibility that the TSA is used to put off difficult decisions by the buyer. Sellers will work to avoid lengthy obligations under a transition services agreement, and will generally only do the minimum required to get the deal done.
I’ve linked to several helpful resources above, including several hundred sample transition services agreements available at www.RealDealDocs.com.
We’ve seen another significant disadvantage of poorly executed TSA transitions:
They severely stall value optimization efforts in the short term. The carved-out company may be locked into business processes that were appropriate for the seller, but inefficient for the smaller standalone business.
Our experience has been that the buyer needs to drive decision making to exit all TSA services as quickly as possible to get full control of the new asset. Sometimes, it’s possible to peel back the TSA piece by piece, but there are often cases where the entire company has to transition to the new operating platform on a single implementation date.