Lost synergies and stranded costs: Why understanding your cost base early matters

By Anna Mattson, Jamie Koenig, and Tim Koller, with Rahul Wunsch

In divestitures, the headline value often dominates early executive focus: What price can we get? What multiple will the business command? But behind that price lies a set of financial risks that, if not properly understood, can fundamentally distort the deal's value.

Lost synergies and stranded costs can reshape the cost base and performance profile of the remaining business. Each has a direct impact on the parent company’s bottom line and, if not anticipated and planned for early, can erode value long after the ink is dry.

Understanding these components is central to the real value equation of a divestiture:

Value created = Price received [1], minus the stand-alone value of the divested business, cost synergies, one-time disentanglement costs, and unaddressable stranded costs.

While disentanglement costs may be one-off in nature, lost synergies and stranded costs represent ongoing structural changes in the economics of the business—and they’re often felt long after the deal is closed. Getting ahead of them is not just about cleanup; it’s about designing for a clean break and ensuring sustained performance.

What gets left behind

When a business is divested, the seller (RemainCo) doesn’t just lose revenue. It often gives up scale and capability advantages, while retaining overhead and infrastructure built for a larger entity. These show up in two ways:

1. Lost synergies, which occur when the remaining business loses operational or commercial benefits that came from owning the divested unit

2. Stranded costs, which happen when cost structures built to support the larger, combined business remain even after a portion of the business is sold

Both need to be addressed proactively and in tandem.

Understanding and managing lost synergies

Lost synergies arise when the remaining business loses access to benefits it previously shared with the divested unit. As a result, RemainCo may operate less efficiently, buy less cheaply, or sell less effectively than before the deal. Most lost synergies can be grouped into two buckets:

1. Revenue synergies, like cross-selling opportunities or bundled customer offerings.

2. Cost synergies, such as shared procurement advantages (volume-based discounts, for example), global supply-chain scale and shared infrastructure, favorable tax treatments and funding terms, or access to specialized capabilities (such as specialized technical R&D teams).

While many of these lost synergies are indirect, they’re not intangible. They manifest in real procurement savings, tax positions, and channel and sales advantages, all of which need to be valued and ideally, quantified. If not mapped and quantified early, they can lead to miscalculated valuations, post-deal performance surprises, poor investor communication, and inadequate cost planning and optimization.

Not all synergies need to be lost on day one. With thoughtful, time-bound deal design, some benefits can be temporarily maintained or gradually unwound to support operational stability and give the business time to optimize its new cost base. For example:

• Commercial linkages may continue for a limited period through distribution agreements, co-marketing arrangements, or joint ventures to ease customer transitions and protect near-term revenue.

• Procurement scale can be partially retained through transitional supply agreements or extended volume contracts that allow time for renegotiation or supply chain redesign.

• Innovation and talent access may be supported in the short term through interim service models or cost-sharing arrangements, particularly where specialized capabilities are not easily replicated immediately.

While not long-term solutions, selective use of these mechanisms can soften the near-term impact of lost synergies and provide RemainCo and NewCo the runway to establish more focused, efficient operating models aligned with a leaner organization. These efficiency gains can often offset or even exceed the value of lost synergies. To capture this value without causing instability, companies should embed synergy mitigation into deal design—identifying where temporary continuity is essential, setting clear exit plans, and aligning mitigation with broader cost transformation efforts.

Stranded costs

Stranded costs are those costs associated with the divested business that stay with RemainCo after the divested business walks out the door. These are often embedded in shared services, central functions, or infrastructure costs that can’t easily be transferred. A simple way to frame stranded cost risks is to ask: If I’m divesting 20% of my revenue, have I also eliminated 20% of my cost base?

Common examples of stranded costs include:

• Shared services such as HR, finance, marketing, legal, and investor relations.

• IT infrastructure and licenses.

• Real estate and facilities, including unused space or leased properties tied to a former footprint.

• Operations and supply-chain costs, such as warehousing or production line allocations

• Back-office and support services.

• Risk, insurance, and governance costs, like board oversight or compliance functions.

• Board and executive management overhead, including leadership bandwidth and decision-making layers

Stranded costs are often within the seller’s control, but demand early, proactive action. Companies that fail to address them up front risk material value erosion: 35 percent of companies that neglect stranded costs face significant value destruction, often experiencing margin erosion three years post-spin-off.[2]

Delaying action until close frequently results in legacy leases, excessive overhead, and oversized service structures that weigh the business down.

Early on, sellers should:

• Allocate shared costs based on real consumption, not legacy accounting splits, to pinpoint true exposure.

• Mobilize finance and functional teams to flag costs that won't scale down, and identify day one risks.

• Build a mitigation road map, reallocating, resizing, or eliminating cost pools, and—where necessary—bridging gaps with transitional service agreements (TSAs).

• Establish clear governance, with designated owners for cost takeout initiatives, and tight tracking against TSA exits, transformation plans, and day one milestones.

Why synergy and stranded cost planning matter for deal design

Understanding stranded costs and lost synergies isn’t just a cost recovery exercise—it’s a foundational part of sound deal architecture. Done early, it shapes critical decisions across the transaction life cycle. For example:

• Perimeter decisions: Whether to carve out a shared team, retain a central function, or transfer a commercial capability can be impacted by significant stranded costs and synergy potential.

• TSA and long-term agreements structures: Knowing where costs will sit allows for better service offerings and smarter timelines, allowing for matching of service durations to lease expirations, labor law constraints, or cost exit plans.

• Restructuring plans: A clear view of necessary cost takeout informs the sequence, scope, and urgency of post-close transformation efforts.

Embedding this thinking up front creates alignment across corporate, functional, and business unit leaders, and avoids surprises such as ballooning overhead, unexpected performance drops, or misaligned investor expectations. Without advance planning, such costs usually cannot be managed effectively, leaving the RemainCo to absorb them.

Ultimately, early cost planning is not just about improving margins—it’s about ensuring that deal design reflects the full financial, operational, and strategic reality of the separation.

[1] This schematic includes both one-off and recurring costs. It is intended to illustrate the full scope of value drivers and detractors, not to serve as an accounting formula.

[2] Based on analysis of excess TSR for over 300 post-spinoff RemainCos of over $500 million from 2000 to January 2023.