Strategic Optimization of Business Units in M&A Transactions

In a high-stakes M&A deal, the spotlight often falls on headline valuations, synergies, and closing timelines. But behind the scenes, what often determines success—or post-deal regret—is how well the acquiring firm optimizes and repositions individual business units. These internal moves don’t get the press releases, but they’re where real value is created (or destroyed). Too many firms still approach integration and portfolio review like a compliance task rather than the strategic opportunity it is.

Strategic optimization is not just about trimming fat or boosting margins; it’s about aligning each unit with the long-term thesis of the deal. That may mean divestitures, carve-outs, capability retooling, or doubling down on capital allocation. And the stakes are only getting higher. According to Bain’s 2024 M&A report, nearly 45% of underperforming acquisitions could have been course-corrected with better post-deal business unit realignment. The lesson? What happens after the closing dinner is what shapes returns five years out.

Let’s take a deeper look at how firms can rethink optimization—not just as a cost exercise, but as a playbook for long-term alpha generation.

Table of Contents

Portfolio Rationalization in M&A: Making the First Strategic Cut

When a buyer acquires a multi-unit target, one of the first questions that should be asked is: “Which businesses are truly strategic—and which ones are just along for the ride?” That question doesn’t always get asked early enough. Too often, acquirers fall into the trap of preserving business units out of convenience, not conviction.

An iconic post-merger case: Take the case of Dell’s 2016 acquisition of EMC. At $67 billion, it was the largest tech acquisition ever at the time. But what mattered most wasn’t the top-line number—it was how Dell Technologies structured the post-merger portfolio. VMware, although part of EMC, remained a semi-independent entity and was later spun out in 2021. That move, rather than being an afterthought, became a critical value unlock. The spin-out of VMware not only simplified Dell’s capital structure but also gave both firms strategic flexibility and investor clarity.

This kind of sharp portfolio segmentation should be standard in every large deal, yet it rarely is. A McKinsey study from 2023 noted that only 38% of M&A deals include a robust business unit-level profitability and strategic relevance assessment in the first 90 days post-close. That’s a missed opportunity. The best-performing PE firms treat each unit like a stand-alone asset—evaluating whether it fits the revised strategy, how capital-intensive it is, and whether its management is aligned.

What makes this process tricky is that underperforming units often have strong internal champions or political weight, especially in corporate M&A. Rationalization isn’t just financial—it’s emotional. It requires a deal team willing to challenge legacy narratives and back decisions with data, not tradition.

One powerful lever during this phase is external benchmarking. Private equity firms often compare acquired business units with pure-play public comps to assess if margin expansion is realistic—or if the unit is structurally disadvantaged. In industrials, for instance, a $300M revenue division with 7% EBITDA margins might look “fine” in isolation, but if the top decile peers in that niche operate at 15%, then it’s time to reassess. Either commit to transformation—or prepare to divest.

This portfolio rationalization isn’t always about cutting. Sometimes, it’s about focusing. Several consumer brand rollups in the last decade, such as Unilever’s acquisition of Dollar Shave Club, deliberately ran smaller sub-brands at a loss while using them to scale omnichannel infrastructure. But even that’s a strategic call—it only works when units have a defined role in the bigger vision.

In short, effective portfolio rationalization sets the tone. It signals discipline, it sharpens execution, and it prevents capital from being spread thin across units with diverging destinies. It’s the first real test of deal logic after the ink dries.

Carve-Outs and Spin-Offs: Tactical Tools for Strategic Realignment

Once the initial assessment is complete, some units—despite being profitable—may simply not belong in the future strategy. This is where carve-outs and spin-offs come into play. Far from being distressed moves, they’re often the most intelligent path to realizing full asset value while re-centering around core competencies.

One of the most well-regarded carve-outs in recent memory is Siemens’ spin-off of its energy business into Siemens Energy AG in 2020. Rather than dragging down the growth narrative of the digital and automation-focused parent company, the energy business was repositioned as a stand-alone, publicly traded entity. The market response? Siemens shares gained 6% after the spin-off announcement—proof that investors often reward focus more than diversification.

Carve-outs also allow buyers to avoid inheriting businesses they don’t understand or can’t optimize. In the 2019 acquisition of Allergan by AbbVie, the divestiture of its generics business to Teva was pre-negotiated—a surgical move to streamline the integration and regulatory process. It also helped maintain investor trust by showing strategic clarity.

The execution side of carve-outs, however, is where most value leakage occurs. Standalone audits, TSA (transition service agreement) planning, and IP disentanglement can quickly become expensive if not managed proactively. According to EY’s 2022 Divestiture Study, over 60% of deals that included a carve-out faced delays or cost overruns due to underestimated separation complexity.

Yet, when done right, spin-offs often outperform. S&P Global found that spin-off companies in the U.S. delivered 10.5% higher TSR (total shareholder return) on average than their parent companies in the three years following separation. The logic is simple: smaller entities can operate with greater strategic clarity, incentive alignment, and operational agility.

There’s also an emerging PE trend around “pre-exit carve-outs,” where a firm separates a high-growth unit within its portfolio, brings in a minority investor or growth capital partner, and uses that external validation to set the stage for a larger exit. Vista Equity has used this tactic with enterprise software platforms—carving out fast-scaling modules as new entities with independent capitalization, which gives the parent fund more flexibility on exit timing.

Carve-outs aren’t just cleanup tools. They’re capital strategy tools. And in a market where LPs expect returns above hurdle and regulators scrutinize monopolistic structures, the ability to surgically separate and reposition assets is becoming a core competency for sophisticated dealmakers

Operational Streamlining: Unlocking Performance in Acquired Units

Optimization doesn’t stop at the strategic level. Even when a business unit fits the post-deal thesis, it still requires operational refinement. Many firms underestimate how wide the margin delta can be between top-quartile and average performers in the same vertical. That delta, when closed, often accounts for a significant portion of total deal value creation.

One case to note: Consider the case of Platinum Equity’s acquisition of Staples’ B2B unit in 2017. Instead of an overhaul, they focused on optimizing working capital, renegotiating vendor contracts, and digitizing procurement—moves that produced tangible EBITDA improvements within 18 months. These are not headline-grabbing strategies, but they compound.

One common mistake is assuming that synergies will materialize without operational retooling. According to a 2023 PwC study, nearly 52% of dealmakers cited integration challenges as the main reason synergies fall short. Yet, most of those issues stem from inconsistent KPIs, misaligned tech stacks, or fractured reporting lines.

Streamlining should begin with a forensic review of cost drivers and performance metrics, ideally benchmarked against external standards. In middle-market buyouts, it’s often possible to unlock 15-20% EBITDA expansion by fixing procurement inefficiencies and optimizing workforce deployment. But it requires grit, not spreadsheets.

Sometimes, even the basics matter. We’ve seen acquisition targets with solid revenue run rates but zero visibility into unit-level gross margins. In such cases, deploying better analytics platforms and training teams to use them becomes a non-negotiable priority.

That said, optimization shouldn’t default to austerity. The better path is usually reallocation: cutting what doesn’t work and doubling down where the unit has unfair advantages. Firms that take a scalpel instead of a machete often find more durable improvements and retain institutional knowledge that would otherwise be lost in blanket cost cuts.

Bullet-proof integration playbooks help, but what truly drives operational lift is the presence of a sponsor team that understands the nuance of the business. Too many generic consultants produce tidy slide decks and flawed execution. The best acquirers embed industry experts who have built and run similar businesses before.

In short, streamlining is a deeply tactical yet strategic exercise. It requires patience, precision, and proximity. And when executed right, it turns even average acquisitions into outperformers.

Exit Strategy Planning: Preparing Units for Strategic Monetization

Optimizing a business unit isn’t always about integrating it deeper. Sometimes, the best path is to prepare it for a strategic exit. Whether through a full sale, IPO, or recapitalization, exit planning is a discipline that begins long before the actual event—ideally, from the day of acquisition.

A standout exit strategy: Look at KKR’s exit from LGC, a life sciences tools business. After acquiring the firm in 2010, KKR spent nearly a decade expanding its portfolio, improving margins, and doubling down on genomic testing. When it eventually sold LGC to Cinven and Astorg in a $4 billion deal, the exit wasn’t opportunistic—it was the result of sustained optimization paired with long-term positioning.

Effective exit planning involves more than a data room and banker bake-off. It requires:

Structuring the unit for clean reporting, minimal interdependencies, and strong standalone governance.
Stress-testing financials to ensure defensible forecasting.
Building a growth story around TAM, differentiation, and scalability—not just recent financials.

That third point is often overlooked. Buyers aren’t just acquiring numbers; they’re buying momentum and belief. A stale growth story, even with solid numbers, will command a discount.

Private equity firms with multiple platform investments are increasingly adopting a portfolio approach to exit timing—sequencing exits to avoid market fatigue, optimize multiples, and reduce portfolio concentration. The rise of continuation funds, secondary GP-led vehicles, and partial sales has also expanded the toolkit for monetization.

In some cases, planning an exit also means engineering demand. If a unit sits at the intersection of an emerging trend (say, decarbonization or AI infrastructure), the sponsor’s job is to make that trend part of the deal narrative. The Carlyle Group, for instance, did this effectively with its stake in CommScope—positioning it as a 5G infrastructure enabler ahead of its 2019 sale.

Finally, strong exit planning aligns incentives. Management teams with clear equity upside, visibility into timing, and participation in pre-sale planning tend to execute better. Misaligned structures, on the other hand, lead to distraction, retention issues, and deal drag. Exit optimization isn’t an afterthought. It’s an operating mindset—and in a market where multiples are compressing, it’s the difference between a good return and a great one.