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When a piece of your company no longer fits: What boards should know

15 August, 2017

Michael Niland
US Divestitures Services Leader, PwC US

Sometimes certain parts of a company no longer fit with the overall strategy. Divestitures are an excellent way to increase your focus on core strategic assets and get aligned to your future vision for your company. And as you might expect, carving out a stronger portfolio is a highly complex undertaking that requires meticulous planning.

While this effort is often led by the management team, a company’s board of directors also plays an important role. We recently released When a piece of your company no longer fits: What boards should know, which provides an in-depth look at divestitures from the perspective of the board.

Directors are responsible for acting on behalf of shareholders to ensure the company is on course. A divestiture is a key time for the board to be highly engaged and part of the discussion. The paper recommends five key questions boards should ask when pursuing a divestiture:

  1. What is the goal of the divestiture?
    Regardless of a company’s rationale, a divestiture should be strategic, with clear and compelling reasons, and the board should fully understand and endorse it. One simple question directors can ask is if and how removing a business unit will allow the company to do something it can’t do today.
  2. What kind of divestiture should be considered?
    Companies have multiple options for divesting a business unit and may choose to either maintain some type of connection with the divested unit or sever all ties. Depending on the exit structure and approach, the regulatory, tax and reporting requirements can vary significantly and usually involve different timetables. The board should understand all the options (spin-off, sale, etc.) and the ramifications of each.
  3. How much time will the divestiture require?
    Divestitures require a significant investment of time, money and energy. Without adequate resources, the transaction could become a distraction that affects day-to-day operations – something the board should be aware of and discuss with management
ahead of time. Directors should ensure management has or will hire the right people to handle the heavy lifting. The board also should be confident in management’s
plan to keep the remaining businesses running effectively while the divestiture is in motion.
  4. How will you handle talent?
    A divestiture can affect employees and managers on both sides of the transaction. Any uncertainty about the parent company’s future after the divestiture could raise questions among the remaining talent and cause them to consider other opportunities. The board should confirm that management is keeping the entire company in mind and has a comprehensive communications plan for the entire deal cycle.
  5. What needs to be considered once the deal is done?
    A successful divestiture requires putting both companies on the right trajectory for profitability and growth in the years following the deal. The board should help shareholders understand how the divestiture may create opportunities for long-term value in both companies and how added costs will be offset over time. The board should also help management with restructuring and competitive assessments to ensure the company is not vulnerable to competitors during this time of transition.

Divestitures are an opportunity for companies to improve efficiencies and returns. As the paper indicates, boards can provide guidance at different stages of these complex transactions. With the right understanding and planning, companies that are considering a divestiture in a dynamic market can achieve strategic goals and ultimately deliver greater value for their shareholders. And outside advisors like PwC can help you each step of the way – from day-one readiness planning to post-separation transition.