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Divestitures

Almost half of all divestitures fail to realize value for their shareholders. This is because many corporations treat divestitures as an afterthought. When these companies decide to sell an asset, they tend to focus only on doing a deal, versus structuring that deal to maximize value. Success all boils down to investor education.

There are three main ways for a company to exit a business—through a trade sale, a spin-off, or an IPO. Determining the transaction model that’s most appropriate for the asset in question is not a simple task. It involves a series of complex trade-offs. Start by having a clear understanding of how each model works:

  • A trade sale is the sale of a business to another company for some combination of cash and stock. Typically, it is conducted through an auction process to facilitate competitive bidding.
  • A spin-off involves creating a new business out of an existing part of the company. Shares in the new entity are distributed directly to a company’s existing shareholders, which in some jurisdictions can result in tax advantages because no cash exchanges hands.
  • During an IPO, also sometimes known as an equity carve-out, the former parent company or the new entity sells a portion of its business to public shareholders, while typically retaining some interest in the company.

The option that’s best depends on a variety of factors that are particular to the parent company, the business being sold, and market conditions at the time of the transaction. Often, owners choose to keep multiple options open as long as possible, pursuing a dual-track or even triple-track strategy to maximize flexibility.

Commercial Vendor Due Diligence

An increasingly common way to accelerate the divestiture process is for sellers to walk in the shoes of a potential buyer before they even put up an asset for sale. This approach is known as vendor due diligence. 

Commercial vendor due diligence is a process in which an independent third-party advisor assesses the asset just as a buyer would. It involves challenging the market attractiveness of the asset along with analyzing the competiveness of its business model and the defensibility of its margins, growth, and market share. The results of these analyses are then shared with prospective bidders to help jump-start the auction process.

Strategic Vendor Assistance

In some cases, the asset in question may not have an immediately bankable business plan. Its commercial position may lag benchmark levels, its end markets may be difficult to understand, or its competitive advantages may be hidden from plain view. In these cases, only a rigorous divestment plan can unlock true value. 

Companies must build a compelling business case for the asset and develop an attractive equity story. They need to prepare the major strategic and commercial portions of the information memorandum and the management presentation. 

They must also identify key areas for future improvement of the business and help shape the thinking of potential buyers about the business's future potential. This process helps sellers anticipate any arguments for discounts and uncover any surprises early in the divestiture process.

Seven Principles of Great Divesting

What does a successful divestiture look like? There are seven principles that apply, regardless of a company’s motives for selling or the type of divestiture they choose.

  1. Don’t let emotions get in the way. Make every decision with the long-term portfolio strategy in mind. Stay objective and look at divesting as a strategic tool.
  2. Know the asset’s value. How much is the business worth to you as well as to potential buyers? Market that value accordingly.
  3. Tell a clear and compelling business story. Outline the asset’s corporate capabilities and potential synergies to investors, and make it clear that there is a long-term growth opportunity.
  4. Work with a strong pool of potential buyers. They should be serious, credible, and motivated for the right reasons.
  5. Sell at the right time. Figure out what drives the industry cycle, and sell when the deal will be most beneficial to you.
  6. Set up a command center. Run divestitures professionally and systematically.
  7. Communicate clearly, promptly, and frequently. Inform shareholders and employees about the divestiture early on, and keep them informed as it progresses. Market speculation and uncertainty can cause unrest.
M&A and Divestitures
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