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When COVID-19 initially slowed mergers and acquisitions (M&A) early last year, we could nonetheless feel the first winds that are now pushing a wave of divestitures. Even as corporate leaders focused on employee safety, supply chain issues, and shifting customer needs, they were already looking critically at their portfolios. They realized that they faced an inflection point—with the pandemic quickly changing the business environment and competitive circumstances—that demanded careful analysis of what should or should not be counted as core to the organization.
Today, M&A activity is going strong, with US deals in the fourth quarter of 2020 dramatically outstripping the same period in 2019.1 We’re also seeing the divestiture surge we anticipated. IBM, for example, announced in October that it will spin off its legacy technology infrastructure business to focus more narrowly on cloud and artificial intelligence.2 AT&T has taken bids for a stake in its DirecTV unit,3 AIG has decided to divest its life and retirement business,4 Spanish bank BBVA has sold its US subsidiary to PNC Financial,5 and Uber has shed its autonomous vehicle unit.6 We believe many more divestitures will be coming this year, perhaps quite quickly.
Supply and demand
In the current environment, we see motivations and catalysts for both potential sellers—companies that are ready to proceed with a divestiture—and potential buyers.
Some companies may have been prompted to review their portfolios specifically because of business changes in the upheaval of the past year. Others may be continuing a process of examining what their organization should look like and using the pandemic to call the question and decide upon a course of action. Either way, the result is an abundance of companies ready to carve out a business, spin off a unit, or otherwise divest operations or assets.
On the demand side, private equity (PE) firms have been raising funds faster than they have been deploying their cash, and their supply of dry powder was a record $1.9 trillion in December 2020.7 They are likely to be ready buyers in the first half of this year, aided significantly by persistent low borrowing costs.
The boom in special purpose acquisition companies (SPACs) is another potentially significant development that could create demand for divested assets. SPACs, which typically have a two-year clock to find an appropriate acquisition, raised some $83 billion in equity last year, or more than six times as much as in any prior year.8 A deal with a SPAC will put somewhat different demands on the seller than a transaction with a corporate or PE buyer. Preparation for a transaction would look somewhat like a spinoff because the assets sold need to be ready to report and operate as a public entity. A SPAC was reported to be among the bidders for AT&T’s DirecTV business.9
Even amid an abundance of buyers in the market, sellers rightfully remain focused on their ability to achieve the highest possible value for any businesses or assets they plan to divest. During an online roundtable Deloitte hosted in October, with the participation of more than 130 executives and professionals involved in M&A transactions, we asked about the biggest hurdle to successful completion of a divestiture. Inability to obtain an acceptable deal value was the most common response.
This concern had been heightened by the upheaval in markets and the business environment due to COVID-19. We asked a similar question in our 2020 Global Divestiture Survey, which we conducted in February, just before the pandemic changed everything. In that survey of professionals from more than 100 global organizations recently involved in divestitures, the ability to get an appropriate value ranked fifth among the potential hurdles respondents cited.
Timing will clearly be an element in getting top value for divested assets, as the rollout of vaccines gives even those industries that have been hardest hit by the pandemic an opportunity to recover. When a business being shed has seen revenues or profits hurt in the past year, there may be disagreement over valuations. The seller can argue that the business is sound, recent weakness is entirely related to COVID-19, and a rebound is coming. Buyers may counter that some of the problems are structural and will persist.
In this divestiture valuation tug of war, the advantage is likely to shift to sellers if the pandemic recedes in coming months. Companies may find that they can pursue their divestitures from a position of greater strength—including potential growth stories to tell about the businesses they intend to shed.
The prepared seller
While sellers can’t control the direction of the markets or the progress being made in the fight against COVID-19, they can help get the highest possible value for their divested assets by being well prepared.
Sellers need to fully consider several matters including working capital, financial statements, tax preparation and structuring, and operational separation planning. These are areas that may drive value for a divested business, and buyers may be willing to pay more if they are properly addressed.
While this is difficult to quantify, we believe a well-prepared seller might typically be able to achieve perhaps 10% greater value for a divestiture.10 Buyers may be willing to pay more when the business case is sound, the financials are clear, and the tax structuring is solid. Or, to view it another way, a buyer may walk away if the seller isn’t well-organized on these points—and the right moment or best buyer may be lost.
1 Based on Deloitte’s analysis of M&A data generated via the Refinitiv database.
2 IBM Investor Briefings, Strategic Update 2020, October 8, 2020.
3 Dan Weil, “AT&T is said to get bids exceeding $15 billion for DirectTV,” TheStreet, December 9, 2020.
4 Leslie Scism, “AIG plans divestment of life insurance business,” Financial News, October 27, 2020.
5 Alan Kline and Paul Davis, “PNC buying BBVA USA for $11.6 billion,” American Banker, November 16, 2020.
6 Camila Domonoske, “Uber sells its autonomous vehicle research division,” NPR, December 8, 2020.
7 Prequin, Preqin Quarterly Update: Private Equity & Venture Capital Q3 2020, October 7, 2020.
9 Cara Lombardo and Drew FitzGerald, “AT&T fields DirecTV offers above $15 billion including debt,” Wall Street Journal, December 9, 2020.
10 Deloitte, Deloitte Global Divestiture Survey, August 2020.
Lauren is a managing director in the Merger & Acquisition Consultative Services practice with Deloitte Consulting LLP and leads the US Divestiture service offering. She has more than 15 years of experience at Deloitte leading large integration and divestiture programs with a focus on the consumer products and retail industries. Lauren earned a BA in Economics from Northwestern University and an MBA from Duke University Fuqua School of Business.
Ryan is a partner with Deloitte Tax LLP in the M&A Transaction Services practice, based in Chicago. Ryan has more than 20 years of public accounting experience including more than 15 years as a dedicated M&A specialist. He has experience in advising financial and strategic buyers on due diligence and deal structuring in a range of industries including consumer and industrial products, healthcare, and technology. Further, Ryan has significant experience advising clients on sell side transactions including the preparation of carve-out financial statements, vendor due diligence reports, tax structuring and modeling exercises, and the tax implications associated with selling S corporations. Ryan’s experience in advising financial and strategic buyers on due diligence and deal structuring in a range of industries has provided him with deep insights into the sell-side process as well as the needs and motivations of acquiring entities. He has been a leading contributor to several articles covering tax aspects of preparing carve-out financial statements and selling S corporations. Ryan has spoken on a variety of M&A sell side related topics including vendor due diligence best practices, tax considerations of carve-out financial statements and selling Subchapter S corporations. He has also been a guest-lecturer at the University of Notre Dame’s Masters in Taxation program. He currently serves as a member of the St. Benedict Preparatory school’s endowment board.
Chris is a partner and the leader of Deloitte’s US Life Sciences M&A practice in addition to the Global Life Sciences & Healthcare Financial Advisory leader. Chris has more than 20 years of experience with Deloitte and has experience in advising financial and strategic buyers and sellers on many aspects of acquisitions and divestitures including: due diligence, accounting structuring, financial reporting, and pro forma financial statements. He has led domestic and global M&A teams on transactions of varying sizes. Chris has significant experience in life sciences and has worked on transactions in the areas of pharmaceuticals, pharmaceutical distribution, orthopedics, medical and surgical products, spine products, diagnostics and lab services. In addition, Chris presents at various industry and technical seminars sponsored by Deloitte and external organizations, and has contributed to Deloitte-sponsored health care publications.