Planning and Managing a Corporate Divestiture
By Russ Warren, EdgePoint Capital Advisors
The Role of Divestitures in Profitable Growth
Strategy is as much about what you do not do as it is about what you do, says Harvard’s Michael
Porter in his classic Harvard Business Review article, “What is Strategy?”.
As a company grows and evolves in a changing environment, and as it makes significant acquisitions,
some business units no longer fit well or perform well and may be worth more to others.
A pruning exercise, or corporate divestiture, can create significant value for shareholders as well
as increase opportunity for unit employees and other stakeholders.
The two keys to creating the greatest value when divesting a business unit are adequate planning and
professional execution.
The Divestiture Team
In a large company, the corporate development department may manage the divestiture process, or
it may engage an M&A advisory firm to handle most activities, subject to its oversight. In a smaller
company, the chief financial officer typically leads the project with outside advisors.
A financial executive is often assigned to verify the numbers presented to a buyer, adjust unit
financial statements to a pro-forma stand-alone basis and at the right time “unhook” the unit from
the company’s IT systems.
The Divestiture Process
Raising the Question
Whether part of a periodic review of unit performance or a larger corporate strategic decision,
the divestiture process begins with raising The Question – should this unit be divested - and a
number of related questions, which might include:
Does this business unit have strategic value in the company’s future?
What are the value drivers for the unit? For example:
- proprietary products, services or skills
- customer base, access
- skilled management team
Would the unit be more valuable to another owner?
What financial effects would divestiture have on the remaining business?
- unabsorbed overhead
- reduced design capabilities
- loss of inter-divisional sales
How can any negative effects be prevented or minimized?
- sale of idle facilities
- outsourcing
- long-term supply agreement
Decision
The recommendation to divest is usually made by the operating executive above the unit, but the
decision is often made by the CEO, after appropriate involvement by other senior executive and the
Board of Directors due to a sensitivity to the impact of the divestiture on employee morale.
A corporate divestiture may have less emotion than the decision by a private company owner to sell
his or her business, but it can be difficult nevertheless. Non-price considerations, like loss of
jobs in the community, may be very important to the divesting company’s reputation.
If the decision is to divest, another set of questions is helpful:
What type of transaction would fetch the highest price and best terms?
- Sale to strategic acquirer
- Sale to international strategic acquirer
- Management buyout with private equity sponsor
- Partial sale to a private equity group and management
- Employee Stock Ownership Plan leveraged buyout
- Spin-off/Initial Public Offering
- Liquidation/shut-down
When is the best time to begin the divestiture process for this unit?
- industry and general economic conditions
- unit-specific situation
- "fix-up" activities needed to maximize value
How will we manage the unit until it is sold?
How will we execute the divestiture process?
Managing the Unit Being Divested
Management of the unit being divested focuses on enhancement of its attractiveness and selling price.
Focus is on unit profitability. Inventories and receivables are managed aggressively. Capital
expenditure requests are reviewed carefully, but not necessarily turned down.
People, too, are important assets, and communicating with employees and key customers – both the
message and timing - deserves careful attention. Some companies develop a detailed written
‘announcement plan’. Non-compete agreements, ‘stay’ packages and other means to secure the
cooperation of key unit personnel can be helpful.
Managing the Divestiture Process
The Divestiture Team’s job is to create the most effective form of competition for the unit among
motivated, qualified buyers, although not all divestiture candidates are attractive enough to enable
an auction.
Most companies offer units pretty much as is. They are however, willing to warrant the big items,
and take seller notes as part of the consideration when necessary to close.
Finding the best buyer candidates and structuring the transaction creatively are skills necessary
for a successful divestiture. With the range of possible transaction types cited earlier, the
divestiture team needs the resources to handle these tasks effectively. If they are not available
in-house, an M&A advisor with relevant experience can be well worth the cost.
Confidentiality will be a top priority of the Divestiture Team throughout the process.
Providing the right information to buyer candidates is essential in achieving best price. The value
drivers and the unit’s future financial potential under an achievable ‘stretch’ scenario must be
communicated in writing and discussed by unit management. DVDs enable a buyer to ‘see’ processes
and locations. Sector background is helpful where buyers may not be familiar.
Audited financial statements for the unit strengthen a buyer’s confidence and should be provided
whenever practicable. If the buyer doubts the reliability of the unit’s numbers, it can kill the deal.
Early in the process, management, with the support of its financial and legal advisors, should
probe and address any likely problem areas.
The company should consider using a virtual data room (VDR), which can expedite closing by making
the due diligence materials available on-line with appropriate security and monitoring capabilities.
The cost of this service for mid-size transactions has dropped considerably in the last several years.
While not the most glamorous activity, a divestiture is an important management activity. It
requires the right people, careful planning creativity and attention to detail.
© Copyrighted by Russ Warren, Senior Vice President of EdgePoint Capital Advisors, merger &
acquisition advisors. Russ can be reached at 216-831-2430 or on
the web at www.edgepoint.com. Portions of this article first
appeared in The Journal of Buyouts & Acquisitions as Practitioner’s Corner by Russ Warren
and John Calfee.