14 March, 2018
As the number of corporate divestitures continues to rise, it’s clear more companies are looking closely at their assets and exploring the advantages of slimming down. This means navigating challenges that can significantly affect the anticipated return from a sale, spin-off, carve-out IPO or other separation.
The number of divestitures in 2017 was the highest in more than a decade, and the total value of divestitures was up from the previous year. In some cases, companies are proactively focusing more on their core capabilities, and a divestiture can provide capital for growth. In others, activist shareholders are pressing management to streamline organizations, with divestiture returns potentially going to investors.
Along with the usual market and company drivers, we can now add tax overhaul as a potential factor in deciding whether to divest. Corporate balance sheets already are flush, and cash repatriated from overseas could give some companies even more ammunition for acquisitions. That could make for a sellers’ market, and firms that previously hadn’t thought of putting a business on the market may reconsider.
Whatever the driving factors, a divestiture usually isn’t quick or easy. A simple sale could be completed in a few months, but most require more time. Spin-offs usually take longer, with the average time between announcement and closure now more than nine months. Highly complicated transactions can take more than a year. Given that complexity, it’s crucial to make sure the pain is worth it, and that the deal delivers the expected value.
I talked about the sources of divestiture value and the key considerations for maximizing that value at the latest Corporate Development Conference in New York. Joining me for a panel discussion were Michael Annes, Motorola Solutions Senior Vice President, Business Development, and David Cole, Vice President and Head of Integration at Intuit.
We agreed that for many companies, it’s never too early to start planning for a possible divestiture. In fact, if a company is a serial acquirer and has grown substantially over years or decades, there’s a good chance it could eventually become a serial divester. We’re seeing that now as some large corporations are focusing on core businesses and considering break-ups.
Whether a company is exploring its first divestiture or has plenty of experience in separations, its leaders should understand and be prepared to manage important issues that often affect the transaction – and help determine its success.
The success of a divestiture depends in large part on doing the right deal at the right time. Companies that understand their growth strategy and business life cycle often use portfolio analysis to rapidly exercise M&A options. An informed decision to sell sooner rather than later allows divestitures to be a vehicle for transformation, value creation and corporate renewal.
This evaluation could reveal if a divestiture really is the best option. In some cases, companies have tried to sell a business that probably should have been shut down. That can be harder than a sale, e.g., if there are several long-term contracts in place. But it still might be preferable to negotiating with a buyer who perceives an abundance of warning signs and tries to use that to its advantage.
Once a decision is made to divest a business, a potential seller needs to be clear about what’s in and what’s out for a buyer. That includes acknowledging any liabilities or other pain points related to the asset. Transparency early in the process is especially important if there are multiple potential buyers, Michael said: “In that case, get that bad news out there as soon as possible.”
When the decision has been made to divest a certain business, company leaders frequently and almost immediately shift their focus away from that asset. That’s understandable, given their responsibility to the remaining company’s ongoing operations and obligations. But it still adds wrinkles to the process.
For example, recall the average time between announcing and closing a divestiture. Several months – or more than a year – is a long time to go without attention and direction from senior management. And if a business targeted for divestiture starts to stray from overall business strategy, its performance can suffer. That could lower the value of the asset before the sale closes – if the decline doesn’t jeopardize the deal.
While senior executives may consider the divestiture target to be gone from the portfolio, the company should ensure adequate governance remains in place. Selecting key management posts early in the divestiture process is critical for defining authority and assigning accountability. Managing a divestiture can be demanding, requiring strong leadership and critical investment of people and capital. All functional areas need to be represented on the deal team and working together to maintain the asset’s viability as a desirable acquisition.
While the concept of selling a specific part of your company may seem clear, the simple fact is that many organizations are highly intertwined, with various operations entangled with one another. As David said during our discussion, “I love when people say, ‘This business is stand-alone.’ That’s almost never true.”
For every employee who may be 100% dedicated to the business that is being divested, there could be another whose responsibilities extend to other parts of the parent company. Then there’s the matter of company-wide support staff, and how many people support the business in question – partly or fully.
In trying to get the best price, companies need to account for the full costs of separation and transition. This requires clear communication and agreement on what it will take to execute the separation, including the transition services. Transition service agreements (TSAs) are vital for preventing disruption and surprise expenditures for both the buyer and the seller.
Negotiating TSAs can be difficult, and the agreements can last months or years past closing. Even then, they still may not prevent the seller from enduring some stranded costs – such as corporate overhead, excess infrastructure and other items that can’t be transferred to the buyer. But without a carefully crafted TSA, a divestiture typically has a harder time earning the expected return.
Next steps for potential divesters
Addressing the above considerations will go a long way to delivering value that can be applied elsewhere within a company. And I agree with Bob Saada, PwC’s US Deals Leader, that 2018 could bring more divestiture opportunities for businesses, making these issues all the more relevant. For more on trends driving divestitures and other deals activity, please visit our PwC Divestitures page.