- March 22, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Divestitures Create Significant value
Divestitures are very familiar, and they create significant value. On average, nearly two-thirds of strategic deals committed divestitures over the past decade. Opportune divestments can expedite the transition to a future portfolio by freeing the time, skill, and potential attached in nonstrategic businesses. Divestments are likewise a source of capital to fuel growth. Some companies apply this tool more regularly and to a more significant impact than others do.
Keeping on to assets beyond their due date destroys value
About 60% of companies delay their divestitures by months, if not years. The most common reason for the delay is anticipating for more favorable market conditions—that is, wishing for a larger sale price. A few other reasons for the delay are complexity in separating operations, cultural resistance, and anxieties about stranded costs and dis-synergies.
We understand that operational matters, such as the complexity of functional separation or the difficulty of evaluating and mitigating stranded costs and dis-synergies, are all addressable with more meticulous preparation.
Cultural reasons for holding divestitures are more challenging to steer and drive to massive value leakage. They appear in different forms. There is the hold-and-hope reasoning in which a firm assumes the business to turn around. Companies are also concerned about contracting their market size, or companies delay divestitures on the understanding that the business impact is insignificant. There may also be a worry of exposing a faulty business to the market. Investor response to divestitures points that these are usually baseless solicitudes.
Companies should instead shift the narrative to one in which they sincerely ask who the best parent is and then discover that parent for their nonstrategic businesses. Delays in divestitures not only hinder a company from entirely concentrating on its strategic growth businesses but also impair the non-strategic activity in the process. For the bulk of corporates, capital is limited, and assets designated non-strategic are the first to see funding reductions. If getting the right value for the business was an issue at the outset, it’s undoubtedly a more prominent concern after a stage of value erosion. Therefore companies need to respond faster when it comes to divestitures.
A limited training goes a great extent in receiving your right share
Once a business chooses to divest, the subject is whether that divestitures create significant value. Corporates customarily tend to underrate the value of the assets they are divesting.
Private equity firms are keen to purchase corporate carve-out assets. Although while companies may keep off on divestitures, anticipating a higher sale price, the more significant problem is that they don’t attract their fair share of value from carve-outs when they do sell because they are under-prepared. It is an especially critical issue when corporates go up against advanced PE buyers.
Various PE deals concerning corporate carve-outs demonstrate this position. A PE exit playbook implemented toward planning for divestitures includes the following:
- Seizing quick-win developments. Execute and accomplish sustainable in-year profit improvements from high-impact opportunities.
- Construct an exit story. Design a strategic action plan to actualize the full potential of the business, and back it with a robust fact base and demonstrated traction on particular initiatives to display early signs of success.
- Set the future buyer view. Draft a value-creation program for the subsequent owner (customized for a corporate vs. financial buyer).
- Prepare for selling quite ahead of time. Ensure quick preparation of selling reports, typically a year before the actual sale, and build a shortlist of buyers 12 months before the sale.
With sufficient preparation, regulator-mandated divestitures don’t become depressing
With multiple industries knocking the limits of consolidation, the possibility that a scale deal will need regulator-mandated divestitures is huge. It professes a risk to both the timeline and synergies.
Regulator-mandated divestitures attach enormous complexity to the divestiture process. They can seem more synthetic than planned divestitures and must get closed within a compressed time frame. Usually, the remedies entail selling a portion of the target’s business, something you don’t understand very well. It places you in a jeopardized negotiating position with the buyer, and you may discover yourself encircled by advisers with opposing goals.
Getting forward of this complexity needs planning for regulator discussions and observing the interdependencies between the integration and separation efforts. The most skilled acquirers take the time to scrutinize the regulator’s plan and develop their wargaming plots to arrange for consultations.
A systematic program to preparing for regulator-mandated divestitures entails five steps:
- Recognize potential levels at risk. Assume how the regulator views the market to classify overlapping business areas that would come under examination.
- Describe the business outline of remedy alternatives. For every overlapping business, establish the potential remedy options (products, geographies) and whether they relate to the acquirer or target’s business.
- Know the value at risk. Evaluate the revenue and margin impact of every remedy alternative.
- Specify discrete divestiture combinations. For each remedy option, estimate probability—maintaining infrastructure, odds of finding buyers, affect on the closing timeline, and so forth.
- War-game likely scenarios. Rank order your possible remedy alternatives and run a scenario analysis to develop your response to different regulator reactions.
It is customarily a complex task requiring trade-offs among decreasing the impact on deal value, satisfying regulatory concerns, drawing interested bidders, and checking separation complexity. A key aspect is also knowing walkaway conditions—particularly those in which the original deal would no longer make financial sense.
As all deal types face growing scrutiny, there is an exceptional value in planning for remedy negotiations. Such preparation presents a tremendous pay-off by lessening the drain on leadership, resources, and the costs of getting into protracted regulatory issues. The most successful companies are proactive. They begin to evaluate and prepare for regulatory risk at the deal diligence and negotiation stage.