Creating Shareholder Value with Divestitures
Divestitures are growing in significance as a means of creating value for companies on both sides of the transaction.Here’s why
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:
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.
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.
Take a look at the key factors to consider when divesting.Explore the infographic
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.
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.