Divestiture activity remains strong, with a twist | Deloitte US has been saved
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Divestitures persist as an important deal driver as 2018 progresses and M&A activity continues at a torrid pace. That’s not much of a surprise; in our Deloitte 2018 M&A Trends Report, deal activity was expected to be robust, and 70 percent of corporate and private equity respondents said they anticipated divesting business units due to shifting strategies and financing needs.
But there is a noteworthy and emerging development in regards to divestitures. As companies review their portfolio and decide whether to optimize their assets, they now are increasingly exploring alternative financial constructs—such as joint ventures and alliances—rather than simply selling or shedding a business unit. In other words, corporations still are looking to get the financing they want and focus on their core businesses, but they are seeking to retain an interest in the divested unit.
In the past, many companies outright sold or spun off a unit, perhaps in an initial public offering or in a tax-free spin. Now, many companies are relying less frequently on the public markets to extract significant cash from non-core business units and more frequently on private financial constructs, in an effort to monetize a portion of their business and still participate in its upside potential—a possible win-win scenario.
What’s behind the change? First, let’s step back and acknowledge that divestitures are increasingly considered a key lever to deliver shareholder value. Though economic activity has picked up in recent quarters, a low-growth environment has dominated much of this decade and has mandated that companies review their portfolio of assets and determine if they are the right owner of all specific business units. When a company determines that the existing portfolio is not delivering optimal shareholder value (or lacks a clear strategic fit), the result is often a decision to divest a business unit and use the resulting additional time, resources, and capital to focus on growth activities.
In the past, a sale or spin-off served as a common way to divest a unit. But many companies now are being more creative about divestitures to drive maximum long-term shareholder value. They are recognizing that, for instance, through a joint venture they can increase the units’ cash flow and drive shareholder value for a sustainable period of time.
This emerging trend isn’t predominant in any one industry, nor is it restricted to large or small companies. Rather, alternative financing approaches to divestitures are a consideration that businesses of all sizes in many sectors are undertaking as they undergo a portfolio optimization process. Sometimes the impetus to divest comes from investment bankers or private equity funds. On other occasions, companies are doing optimization analysis on their own. Irrespective of whether the impetus is “pushed” internally or “pulled” from outsiders, the divestiture process begins when a company decides that a certain division or piece of the business may no longer make sense for a variety of strategic reasons.
Buyers or investors used to unleash the value of divested units by leveraging deeper market penetration, larger footprints, or brand recognition, for example. With an alternative financing model, whether it’s a franchise model, alliance, or JV, a company now has an ongoing stake in the potential upside of unlocking that value—triggering this emerging trend in divestitures.
Michael is a partner with Deloitte & Touche LLP and has more than 22 years of business experience in both public accounting and private industry, based in both the Netherlands and the United States. Mike has deep experience in accounting and reporting for transactions gained through multiple engagements relating to multi-billion dollar carve-out financial statements, purchase price allocation accounting including the push down of fair value within a multiple legal entity structure and IPO readiness and remediation projects. Mike has spent several years of his career as part of Deloitte’s National Office – SEC Services Group, working in the area of initial offerings and other stock and debt registrations. He is a CPA and a member of the AICPA.
Anna is a principal in the Merger & Acquisition Consultative Services practice with Deloitte Consulting LLP and leads the US divestiture service offering. She has more than 18 years’ of experience and has led more than 30 integration and divestiture engagements ranging from $450M to $30B, supporting the banking, high technology, consumer products, and manufacturing industries.