Exit Strategy and Carve-Outs

Sometimes, a detailed portfolio analysis results in a strategic decision to sell part or all of a business. Divestitures can free up capital, increase management focus on core parts of the company, strengthen the balance sheet, and lead to growth in the remaining business units. Like an acquisition, a divestiture must be carefully considered and grounded in a clear exit strategy.

Planning Your Exit Route

Whether a trade sale, spin-off, or IPO, a successful divestiture starts with a thorough portfolio review. Only an honest assessment of the potential for value creation, the ownership advantage of the corporate parent, and alternative (and perhaps better) ways to deploy capital can determine whether a divestiture makes sense. 

Sellers should consider three factors: the parent company’s situation, the attributes and prospects of the asset in question, and the current state of the market. Ignoring or missing any of these factors will make it difficult to create value through divestiture. Here are key questions that must be answered:

Parent Situation

  • What role does the asset play in the corporate portfolio? Does the current owner contribute any parenting advantage? Or are there other, better owners with greater potential to create value from the asset?
  • What is the future value-creation potential of the business?
  • Are there any important synergies between the business and other businesses in the portfolio?
  • Does the current owner need to free up capital to invest in other, more value-creating opportunities?

Asset Attributes

  • Can the asset stand alone, or is it dependent on critical corporate functions or headquarter?
  • What is the asset’s current value? Would taking the time to execute key initiatives such as turnaround programs or new growth strategies make the asset more attractive to buyers than if it were sold immediately?
  • What kind of buyer will be the best fit for the asset, and which specific ownership advantages will drive this decision?

Market Environment

  • Is the asset’s industry at a trough or a peak?
  • How receptive is the market for the asset, considering its specific cash and risk profile?
  • Is the market environment favorable in terms of valuation levels, financing conditions, and volatility?

Executing a Carve-Out

In many cases, before a transaction can take place, the parent company must first perform a carve-out to ensure that the business being sold has the legal foundation, administrative infrastructure, and commercial capabilities it needs to stand alone. 

Careful carve-out preparation lays the foundation for successful business divestiture. It is especially necessary when all the functions that are required in a stand-alone entity do not yet exist within the asset to be sold. These include organizational infrastructure, financial operations, and sales and marketing functions.

Important questions have to be answered before a new entity can be formed and sold to a new private or public owner. These questions include: 

  • Does the new entity have all the viable business functions it needs to stand on its own? 
  • What is the most appropriate relationship between the divesting company and the new business?
  • Will the operational cash flow of the asset be attractive enough on its own? Or will the seller need to extend a lifeline in the form of an ongoing contractual relationship? 
  • Have all other concerns—such as legal issues, pension commitments, and tax issues—been evaluated and resolved?
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M&A and Divestitures