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With the rise of the activist investor mind-set, the executive boards and management teams of large corporates are being challenged to view their portfolio of businesses through an increasingly critical lens. Traditionally, boards have been generally conservative and tend to place greater importance upon the size or revenue of the business, over margin and profitability. Conversely, the activist investor places a premium upon small and valuable, rather than large and mediocre.
Therefore, to respond to activist investor demands, boards should be proactively reviewing their businesses and assessing whether each business unit is delivering the returns that are in line with the capital and management time they respectively demand. If any of the businesses are not delivering adequate returns from these inputs, they are not contributing to growth in shareholder value and the activist investor is likely to classify such ‘problem children’ as non-core to the wider group.
So how should a management team deal with an underperforming or non-core subsidiary?
Well there are three potential options – Fix, sell or close:
Fix – is there a viable plan to turn the business around through top line growth, efficiency savings or cost rationalisation?
Sell – is there a group of potential purchasers who see value in the business? This may include a sale for value or a transfer of the business with a dowry to fund future trading.
Close – in this scenario management teams are likely to want to manage reputational risk for the rest of the group, and prevent any contagion impact from an unplanned insolvent exit. Therefore, often a managed solvent exit is likely to be optimal. However, this needs to be planned carefully and implemented in a structured way, controlled by a project management function.
If you would like to find out more about how Deloitte can help please do get in touch. We have a specialist multi-disciplinary service line team capable of assisting management teams throughout this journey, from options analysis, through to planning and execution.
Simon is a senior member of the UK Restructuring Services team in Leeds and is the Managed Exit lead across the North. He specialises in advising large corporates on dealing with underperforming or non-core subsidiaries. Simon has 15 years of experience within restructuring, working on projects advising corporates that are exhibiting a level of stress or distress, and their stakeholders.