Re-aligning your business through divestment
In continually evolving markets that are becoming increasingly challenging, the execution of carve-outs and divestures are some of the options available to deliver against corporate strategies and objectives.
- Determining what's really for sale
- Compiling the financials and considering the deal structure
- Marketing the business and adapting to foreign buyers
- Planning for separation
Companies need to critically assess their existing business and their portfolios of assets and ask:
- is the financial return sufficient /enhancing the overall group return or diluting it?
- is the business/division part of the core offering or it's future direction?
- are you the right owners of any given business / division to manage the business through future challenges and maximise future growth opportunities?
Ultimately if the decision is to potentially divest, then the key areas for consideration in our experience are:
At first glance it might appear obvious what is being sold however, determining which assets form part of the transaction can prove to be more difficult. Often in international companies, key assets, as well as managers, are shared among multiple business units but are often housed in one legal entity. Deciding which of these assets and people stay with the parent and which ones go with the sale can be complicated and expensive, particularly if economies of scale will be lost, operations are shared, or repatriating employees is being considered.
Are you capable of providing financial information for the portfolio asset/division of the business being sold? While P&L information is often available by division, divisional balance sheets, cashflows and working capital profiles are less frequently available and it can be difficult and cumbersome exercise to extract this information. The carve out business may incur additional costs once it splits out from the parent. These costs could include new management positions, back office services that were previously the responsibility of the parent, and higher prices for materials, insurance and professional services as a result of decreased purchasing leverage. Transitional service agreements (TSAs) may also be necessary, which require time, effort and negotiations to set up. Indeed these types of costs could be larger in a cross border deal since a foreign buyer may not have existing facilities and staff in the countries where the carve out business operates.
Sellers should be aware of different cultural norms and expectations when working with foreign buyers. These cultural differences can affect many aspects of the sale, from negotiations through closing and transition of management. From the outset, foreign buyers may have corporate governance structures that are more rigid and bureaucratic than those of domestic businesses. This may translate into more approvals, a longer process for obtaining sign offs, and consequently more time to complete the transaction. Throughout the marketing process, prepared sellers should be willing to adapt their tactics accordingly in an effort to maximise value and maximise deal terms.
Understanding the buyers' motivations, capabilities and integration strategy can help the seller to scope their effort and plan their project management of the transaction appropriately. If the buyer is entering new markets or geographies through acquisition, the seller should be prepared to play an active role in planning the integration. Managing the people side of the separation is also a vital aspect of the divestment plan. Ignoring the needs of employees, customers and suppliers can have significant adverse impacts on the deal itself as well as on the retained business. The public relations impact of a cross border sale to a foreign buyer, can greatly affect employee morale as well as decrease the value of the retained business if operations/offices are closed and jobs are lost in the home country.
Getting value from divestments can be challenging. Companies report that many divestments do not yield expected value, that the sales process is often more costly and more drawn out than anticipated, and that non-financial costs such as impacts on morale, reputation and customer perceptions can be significant. To help meet these challenges and avoid common errors of strategy and execution Deloitte surveyed 123 global organisations to obtain their perceptions on how they delivered value through divestment. In order to achieve a successful divestment result over two thirds of those surveyed advised that execution of a divestment requires planning, leadership and speed and the ability to manage morale. Over half the respondents say that they should be doing more preparation and providing more analytical data during the divestment process.
Deloitte has the expertise and experience to address these gaps by assisting in divestment planning, preparation and providing robust data sets to support the process.