by Tom Allen
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Divestment Strategy Is Key to an Efficient and Successful Sale
Many companies are proficient in the acquisition process – with skills and capabilities to match. When it comes to divesting, however, many companies have never been through the process. And to make things more complicated, divesting of a business can often be more difficult than acquiring one. Running a successful divestment, just like an acquisition, requires an experience-driven skill set and a lot of preparation. Being a prepared seller involves identifying problems before they occur and taking early action to minimize disruption to employees, shareholders and other stakeholders. According to EY, 41% of surveyed companies stated that a lack of preparation adversely impacted the value of their divestment and 51% reported the divestiture took much longer than the expected three-month timeline.
Getting Divestment Ready
Getting divestment-ready extends far beyond identifying potential buyers. To get divestment-ready, a company – amongst other things – needs to:
- Conduct strategic analysis of the business unit in-scope for divestment (see Building Sell-side Capabilities);
- Critically assess the underlying drivers of the potential divestment and understand any possible adverse implications of divesting;
- Understand the overall M&A market-landscape (e.g. is it a buyer’s or seller’s market, how are deal multiples trending, etc.);
- Undertake a valuation exercise and consider a range of possible outcomes;
- Research potential buyers and appraise the merits of strategic versus financial buyers (and vice versa);
- Establish a divestment and separation team;
- Ensure the completeness and accuracy of any information within the scope of buyer due diligence (e.g. financial statements and contracts);
- Establish methods to minimize disruption to everyday business activities across the divestment process (including separation).
Getting divestment-ready cannot be achieved in two to three months. A successful divestment should commence 12-18 months in advance of the start of the divestment sales-cycle (i.e. going live to market). This level of planning is necessary to ensure that a divestment team remains in control and can set the pace and direction of the divestment-process. And a word of warning: reacting to an unsolicited/off-market approach from a supposedly interested potential acquirer and making a knee-jerk reaction to entering into a sales-process is typically the worst thing you can do.
Ultimately, the more prepared you are, the greater your ability to control the divestment outcome.
Why Sell-Side Divestment Planning Matters
Put simply, sell-side divestment planning entails the review, analysis, decision-making and actions required for a successful divestment. Divestment planning should be tied to long-term corporate goals and have strategic intent at the core.
To help establish early-stage divestment priorities, consider these simple questions:
- Why are we considering a divestment? Identify the reasons underpinning the divestment – for example, declining revenue, lack of strategic fit with corporate objectives, the need to raise capital/service debt/refinance, etc. (or reacting to an unsolicited offer – see above);
- How should we divest? This is tied directly to corporate goals and timelines and will likely have an impact on the pool of potential buyers targeted – e.g. outright 100% sale, partial sale, equity carve-out, etc.;
- Who wants to acquire? Having a good idea of potential buyers will help when it comes to marketing a business unit for sale and is likely to impact the purchase terms;
- What makes the business unit saleable? Consider what makes the business unit attractive and why it would be more valuable under different ownership.
Bain & company outline that 53% of senior executives report that having a clear strategic rationale for the divesture is behind divestment success. This emphasizes why being divestment-ready requires a 12–18-month window. Success doesn’t happen overnight, but failure certainly can.
Determine the Divestment Rationale
Careful consideration should be given to the rationale underpinning a divestment, since it helps frame the story presented to shareholders, employees, other stakeholders and – perhaps most importantly – potential buyers.
While by no means an exhaustive list, the most common drivers of divestment activity include:
- Refocus on core competencies: A company needs to be competitive in its primary service or product offering. Refocusing on a core competency in light of competition is one of the biggest drivers of divestment activity today;
- Raise capital: Divesting a business unit generates capital that a company may redeploy to areas where it can achieve higher returns – perhaps for corporate venture (CVC) activity, new acquisitions or to pay down debt/refinance;
- Unlock value: A business unit may perform much better under the ownership umbrella of another company whose core competencies align with that of the business unit targeted for divestment;
- Meet anti-trust requirements: Under anti-trust laws, government regulators may force a company that operates in an uncompetitive industry to divest or separate itself from a business unit to proceed with an M&A transaction that would further limit competition in the industry. Faced with this decision, the selling company must decide whether to divest or forgo the proposed acquisition.
Building Sell-side Capabilities
A continuous focus on the portfolio management of business units and a cadence of regular, small divestments is typically less disruptive than a blockbuster “mega divestment” – or divesting of multiple business units at once – due to the risk this brings, and the disruption caused to the ordinary course of business. Focusing on core business units allows a company to communicate a clear and compelling growth story. Conversely, selling “when you have to” is too late and might be interpreted as a sign of distress in the market. On this point, Harvard Business Review outlines that taking this approach is central to building internal sell-side capabilities.
A portfolio management-led approach to evaluating business units as potential divestment candidates can be supported by establishing a dedicated sell-side team (either with or without support from external advisors). The remit of this team should be to continually/periodically review business units and identify those that could be deemed as suitable divestment candidates. EY reports that 63% of companies hold onto business assets for too long (rather than divesting) – so taking approach can prevent a business unit becoming orphaned or being held for longer than it should.
There’s a myriad of assessment criteria to consider when it comes to evaluating a business unit for divestment – some examples are outlined below.
- Does the business unit align with the company’s current strategy, long-term vision and mission statement?
- What are the business unit’s core value drivers?
- How does the business unit impact other parts of the company?
- How would divesting impact the company’s overall supply chain?
- What is the quality of the management team, and how would a prospective buyer perceive this?
- What is the short, medium, and long-term financial outlook?
- Is demand for products/services growing or in decline?
- Does the P&L contribute to overall financial success?
- Is the business unit burning cash or consuming resources at an unsustainable rate?
- Are profit margins growing or in decline?
- Are there any emerging markets that may contribute to long-term financial success?
- Does the business unit have a clearly defined market position?
- What products and services do competitors provide?
- What are the key benefits and features of products and services offered by competitors?
- Is the primary industry dominated by a small number of competitors (i.e. concentrated) or is it fragmented and susceptible to consolidation?
- What are the gaps in existing product/service offerings?
- Do any competitors have a clear and sustainable advantage?
- Is there a dominant M&A player?
- What intellectual property, proprietary products and services or skills (people) does the business unit possess? How attractive would these be to a prospective acquirer and could they help the business unit command a premium valuation on sale?
- What patents have competitors been able to secure and do these curtail operations of the business unit (freedom to operate).
- Is the customer base attractive – consider key customers and logos.
- Is the customer base stable – consider churn on a monthly/annual basis and compare to industry norms.
- Are there untapped opportunities for cross-selling with other areas of the company?
- Would divestment disadvantage the company when it comes to retaining or growing its customer base?
Risk & Compliance
- Are there any critical operating risks to consider?
- Is the business unit compliant with internal policies and any relevant external regulations?
- Is the business unit operating in a highly regulated marketplace?
- Could anti-trust/laws/competition policy impact divestment activity?
Impact of Divesting
- Would the business unit be more valuable to another owner?
- Is the estimated value of the business unit likely to generate a significant cash in-flow?
- What are the tax implications of divesting? Could a chargeable gain crystalize?
- Would the company experience unabsorbed overhead costs, reduced capabilities and loss of inter-divisional sales as a result of divesting of the business unit?
- How will the divestment be interpreted by the market (consider framing a “divestment story”).
See here for more on strategically assessing business units: 3 Divestment Strategy Frameworks to Align Portfolios
Conduct a Divestment Readiness Assessment
A divestment readiness assessment can be completed internally via a survey, workshop, or a combination of these. An assessment can also be undertaken by outside experts via interviews and standard data collection methods. These methods include employee and manager interviews and surveys. When collecting data from a large number of employees, focus groups can also be used in place of one-on-one interviews.
Information collected from the readiness assessment can help shape a divestment strategy. This includes:
- The most appropriate governance model to oversee the divestment;
- The key people to manage the divestment and expected resource requirements;
- The most appropriate executive sponsorship model and support;
- Critical timelines and milestones;
- The principal risks and how these can be best mitigated;
- External consulting and support requirements (e.g. tax, accounting, financial).
- Getting divestment-ready takes time and goes well beyond lining up potential buyers. Consider planning 12-18 before going live to market;
- Be sure you understand the driver(s) of the divestment and think about the divestment story (how to frame the selling of a business unit);
- Take a portfolio management approach to business units and build sell-side capabilities via establishing a dedicated divestment and separation team;
- Consider a broad range of assessment criteria when it comes to evaluating business units as potential divestment candidates;
- Consider conducting a divestment readiness assessment to help shape the divestment strategy.