Everybody Wins in Divestitures

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Executives hesitate to sell noncore businesses for many reasons. Many are reluctant to shed revenue, concerned about the market’s reaction to a smaller company and the challenge of stranded costs. Some worry about selling low, reasoning that with an additional year or two, the business could improve its trajectory. Others have trouble accepting the fact that it could perform better in another’s hands. Still others view divestitures as a hassle: a lot of work with which their teams are less familiar. While most companies have at least some track record at buying and integrating businesses, divestitures often require flexing muscles that are underdeveloped.

The good news is that divestitures, particularly ones that strategically clean up a company’s portfolio and that are positioned to command an optimal price, can generate shareholder value. They can also create a catalyzing event for improving the remaining business. When done well, they reduce complexity and provide fuel for the company to pump back into its core.

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Four steps for successful divesting

  1. Proactively manage your portfolio. Start with the basics of understanding how all of your portfolio businesses contribute to your core and regularly assess them for fit. What is each business’s competitive position and ability to win? Do you have the right resources and capabilities to take it to full potential? If not, are there other companies where it would be a better fit? To be attuned to divestiture candidates, evaluate your portfolio from the outside in, anticipating disruption and redefinition opportunities. Only by systematically assessing your portfolio can you identify the business units that would deliver more value in another owner’s hands.
  2. Thoroughly plan and prepare to optimize value. Don’t race to sell the asset. Create a blueprint for making it attractive prior to selling—even better, begin implementing some of those initiatives prior to sale. We have found that 6 to 12 months is the right length of time to establish the blueprint and demonstrate progress. This allows you to improve the value of the business while you still own it and also demonstrates to a potential buyer what is possible. Both of these can help you achieve a higher price.While determining how to increase the value of the divested business, it is also important to do the same for the remaining company. Again, the divestiture process creates a catalyzing event for determining how to right-size the remaining company, beginning by estimating the level of anticipated dis-synergies and developing a plan to offset them. The best companies plan to minimize stranded costs by adapting the infrastructure and the back office, as well as adjusting the IT architecture to match the smaller scale and shape of the post-divestiture business.
  3. Focus your selling process on buyer value creation. Many sellers leave money on the table by shortcutting the divestiture process. Once they decide to divest they may call an investment banker, put an offering memorandum together and move as fast as they can. Based on our experience, divesting companies with the strongest track records take a more thoughtful approach. They devote the required resources to perform reverse due diligence to help decide who could create more value and how it could be created—critical knowledge that helps a seller negotiate the best deal.
  4. Use the carve-out moment to make the remaining company future-ready. The deal’s been made. It’s now critical to carve out the old business, adhering to your priorities with a low-risk process that neither imposes risk on the business nor distracts the team. It is also an opportunity to wipe the slate clean and prepare for the future with a more focused business.

Indeed, as more companies are discovering, divestitures are an important tool in a senior leadership team’s arsenal. They can deliver mutual benefits to both sellers and buyers. They are complex, however, and many companies’ muscles are not as well-developed with divestitures as they are with acquisitions. As a result, divestitures need careful attention both before and after the sale to deliver outsized value. Companies that regularly prune their portfolio, take an active hand in preparing assets for sale, manage the separation and use the sale funds to acquire core assets in a repeatable M&A program outperform inactives by 40%. That’s how divesting can be a win-win for buyers and sellers.


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