- June 15, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
How to Execute Divestitures Successfully To Increase Value
The decision to divest an asset can be exacting and protracted: managers contemplate about sunk costs, the size and extent of their portfolios, and the state of their strategic objectives. However, once all views get heard, and the definitive decision made, managers encounter an even more daunting hurdle, executing the divestiture. In this post, we will define the list of steps on how to execute divestitures successfully to increase value.
To favorably part with an asset, executives must choreograph a series of crucial tasks and examine the opinions of internal and external resources and advisers—likely buyers, current employees, boards of directors, and so on quickly. McKinsey’s research reveals that, on average, separations performed within 12 months of communication give higher returns to stockholders than those that take longer.
In most cases, however, business leaders earmark more time to the issue of whether rather than how to divest. According to Mckinsey, business leaders should break the divestiture method to separate activities:
- Defining the asset to be divested,
- Marketing the divested asset, and
- Existing business disengaging the asset.
For example, a business that wants to sell a business unit must recognize the asset’s crucial characteristics in the proposal. It can also contemplate how to disengage it from others in the company’s portfolio while concurrently deciding on the valuation narrative to describe likely buyers. Segmenting the separation process in this approach can help companies surmise where to start and where to concentrate their energies. This approach would improve the plausibility of divestiture success.
How to Execute Divestitures Successfully – Where to start
Once the management gets approval from the board to continue with a divestiture, business leaders lead directly to the marketing exercise. They employ a deal team, hire an investment bank to assist the sale process, assess the potential universe of buyers, and develop a report describing investment highlights. Of course, this method will serve if the asset in issue is a stand-alone entity with a solid track record—for instance, if it is a distinct business unit within a more massive conglomerate that overlays minimally with another business in the portfolio.
The better way to start the divestiture process is by analyzing the assets’ financials. After that, the management should consider likely disentanglement problems before beginning any marketing endeavors. In doing so, sellers are less inclined to leave money on the table or introduce skepticism among buyers about the asset’s issues, which could kill a deal.
Before thoroughly assessing the upside potential and origins of value for an asset on the block, many companies make a blunder to initiate the marketing task. The companies provided an estimate for the cost of transitioning the asset to potential buyers in their marketing materials. After the offering memorandum release, more in-depth financial analyses generally indicate that the corporate allocations employed to produce that assessment were extremely understated. Sophisticated bidders take advantage of this during negotiations on the transition service agreement.
How to Execute Divestitures Successfully – What to concentrate on
Even the most seasoned business managers and divestiture partners can have difficulty discovering when and how to marshal limited resources in high-pressure deal conditions. Hence a focus on the three core exercises— setting the deal outline (describing the asset), build upside into the valuation (as a component of marketing the asset), and draft a road map for separation (disengaging the asset) would make sense.
Set the deal perimeter
A typical slip among sellers is starting into due-diligence processes and negotiations with buyers without thoroughly understanding what they are selling. Sellers should alternatively take the time to evaluate both the buyer landscape and the value-creating features of the asset in question. In this process, they can obtain a greater insight into the marketing messages that will draw potential buyers as well as the work that may be needed to transition an asset. The divestiture team must set a boundary around the deal. This scope entails drawing clear lines around the operations, products, intellectual property, and commercial capabilities (salesforce) connected with the asset. The team should examine the subsequent crucial issues:
- Which products, geographies, and groups of employees are in scope for the transaction;
- Which contracts will get reassigned;
- How shared intellectual property will be handled (transferred completely or licensed); and which systems will persist with the divested asset.
The divestiture team should ensure that it applies comprehensive and up-to-date data during this asset evaluation.
Formulate upside into the valuation
Corporate-development organizations must ensure that all the technical specifications connected with the sale of the asset can get met. Besides, they must ensure that the firm is getting the most suitable price for the asset. Deal teams must take a brand-new look at the performance of the business unit or asset to get divested. They must provide an accurate estimation of the upside opportunities rooted in the valuation model and, ideally, drive buyers toward a deal price based on a multiple of the company’s adjusted EBITDA. The deal team must move further in highlighting for particular buyers how the deal could increase their profitability through, say, distinct market positioning enhanced technological abilities or the compatibility of the divested asset with different businesses in their portfolios.
Draw a ‘separation road plan.’
One of the significant roadblocks to separations is managers’ failure to predict all the dependencies and interdependencies connected with the asset in the subject. A complete “separation road map” should capture all activities as well as the sequencing of functional and cross-functional work streams linked to the divestiture. It should connect the expected goals and milestones for the separation with the appropriate deal process steps. For example, the separation tasks of “create a census of assigning employees” and “develop day one planning hypotheses” should agree with the deal process step of “develop confidential information memo.”
Divestiture units will need to be conscious of the time frames required to execute all the steps in their road maps. Some business complexities, like shared manufacturing, IT systems, and facilities, are more intricate than others, and they can take more time to fix. To better pace their investments and lessen business disruption, deal teams may need to develop stage gates into their road maps—triggers that enable companies to suspend separation activities if chosen thresholds don’t meet. The senior management and the board could conduct regular cost-benefit analyses and formally examine whether to continue with or stop any disentanglement activities.
Divestitures can be defying for the groups tasked with executing them. By defining the assets in question, marketing them efficiently, and predicting the complexity of disengaging them from the existing business, managers can maintain the focus on generating the most value for buyers and sellers alike.