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

Is a divestiture right for your company?

Focusing on growth is a given when it comes to increasing value for a company’s investors. That can mean exploring an acquisition or a strategic alliance—actions that expand the organization’s reach. But a divestiture could also help boost returns for shareholders, or improve sagging company performance. In fact, many shareholder activism campaigns have urged selling parts of companies as a way to unlock value.

Divestitures can be challenging. A company must identify the business units to be separated, decide on the type of separation, and either develop a standalone operating model and cost structure for that business or prepare it for sale. While these steps may seem straightforward, a divestiture ultimately is a surgical procedure, with a degree of complexity that demands careful planning and caution.

When a company has identified a business or division that doesn’t fit its overall strategy or could pursue new opportunities as a separate entity, it raises important questions for the board:

Recent economic changes due to the pandemic are reasons for management to actively and critically review their portfolios. All of the pieces of the company should fit squarely within the company’s strategy and contribute to the goal of creating long-term value.

What is the goal of the divestiture?

The reasons for removing part of a company can vary. In some cases, the changes in economic circumstances may have made a particular business unit unsustainable. In other cases, a business unit might not align with the company’s current strategy.

A company also could see an opportunity through a divestiture. A thriving business may have outgrown the parent company and be ready to chart its own course with its own management and board. Individual parts of an enterprise could be more valuable as separate businesses or part of another company, particularly if one or more of them have become successful brands.

Or a company may divest a business so it can reinvest the proceeds in the remaining company or pursue growth opportunities, including acquisitions.

What kind of divestiture should we consider?

Companies have multiple options for divesting a business unit and may choose to either maintain some type of connection with the divested unitor sever all ties. Depending on the exit structure and approach, the regulatory, tax, and reporting requirements can vary significantly and usually involve different timetables.

In a carve-out IPO, a company separates a business unit or subsidiary but offers only a minority interest in the new entity to outside investors. The result is two separate legal entities, each with its own financial statements, management team, and board of directors. But the parent company retains a controlling interest in the new company, which allows the parent to provide strategic support and resources.

A spin-off creates an independent company with its own equity structure, with shares in the new company typically distributed to the parent company’s shareholders. Unlike a carve-out IPO, the parent company doesn’t have a controlling interest and instead holds no equity or possibly a minority stake. This allows the parent company to focus on its strategic long-term goals.

A split-off is similar to a spin-off in that it also creates a new entity with its own equity structure, and the parent company doesn’t have a controlling interest. The difference is that shareholders can essentially exchange shares in the parent company for shares in the new company. Shareholders choose whether to participate in the split-off by swapping some or all of their parent company stock for subsidiary stock.

A parent company may contribute a portion of its business to form a joint venture (JV), with or without control. These transactions can unlock synergies with a partner and provide access to other assets when other transactions may not be available. They require continuing involvement over the life of the JV and significant financial, operational, and reporting considerations in structuring the JV.

A trade sale typically is the cleanest type of divestiture, with a company completely turning over a subsidiary or business unit to another company, a private equity firm, or some other buyer. 

What are the key challenges?

If a company has decided that a divestiture is wise, a threshold question will be whether there is a market for the transaction. Regardless of the structure, the transaction will only make sense if there is appetite for the business unit, either as a stand-alone business or as a target. In some cases, the company may want to delay the transaction until the market is right.

Timing can also be an important consideration in any discussion about a potential divestiture. Different types of divestitures typically take different lengths of time to complete. That matters if a company needs to separate a business quickly—because of economic pressures, market concerns, or broader company-related issues.

A sale usually takes the least amount of time—anywhere from a few months to a year. If a company needs to secure capital, reduce expenses, or make some other financial or strategic move in the short term, it may be limited to contemplating a sale because other deals would take too long.

What risks should our board watch out for after a deal is done?

A divestiture can be an opportunity for a company to more aggressively pursue its strategic priorities. But a successful divestiture means going beyond executing the details of the transaction and taking the necessary legal steps to separate a business from the company. It requires putting both companies on the right trajectory for profitability and growth in the years following the deal.

This means striking the right balance when it comes to changes post-deal. If the new entity and parent company make only slight adjustments in strategy and operations, they run the risk of simply being smaller versions of the formerly combined company, with stranded costs and few, if any, new advantages. But if the two entities make drastic shifts, it could make the divestiture process even more complex and overwhelm the companies, leaving them fumbling as they set off in separate directions. The board can help with this balance by engaging management on the divestiture plan and, if it’s not a full sale, ensuring that it will leave both companies in competitive market positions.

Contact us

Maria Castañón Moats

Maria Castañón Moats

Governance Insights Center Leader, PwC US

Michael  Niland

Michael Niland

US Divestitures Services Leader, PwC US

Leah Malone

Leah Malone

Director, Governance Insights Center, PwC US

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