March 7, 2016
Maximizing Value: How to Divest for Success
Divestment is the opposite of investment. It’s about driving positive corporate change by selling – rather than buying – assets, lines of business or subsidiaries. The principle is simple: By staying laser focused on the core products or services driving the highest yield, and shedding assets that are less profitable or loss leaders, you can maximize performance.
In practice, however, companies often divest in reaction to pressure from sustained losses, intolerable debt burden, analyst downgrades or other market-driven forces. This type of divestiture is usually not part of a well-planned strategy. Instead, it demonstrates a common misconception in business that, while mergers and acquisitions signal growth and strength, divestitures signal weakness and even failure.
For example, when Microsoft sold its display ad business to AOL, Fast Company’s reporting on the transaction led with the acquisition perspective that “AOL just got control over some of the most prominent advertising space in the tech world.” But it was a good strategic move on Microsoft’s part, too, allowing the company to focus more closely on its higher-priority cloud business going forward. The deal benefited the seller as well as the buyer – and serves as a good reminder of just how important an active and strategic divestiture plan can be to creating corporate value.
Planning Is Everything
A smart and well-informed management team who understands their company’s position in the marketplace and knows how to best capture profits and market share will have an overall plan that incorporates both strategic acquisitions and divestitures.
Companies are more apt to get a proactive divestiture program started, supported and strategically embedded in company culture if they develop and employ a rigorous and repeatable divestiture program. Unfortunately, while most companies commit substantial resources and investment dollars to acquire and create new businesses and hone existing operations, divestitures rarely receive the attention they deserve. To ensure the company maximizes the return on a sale, while ensuring the remaining business units continue to operate synergistically and to their full potential, a strategic and well-executed divestment plan is crucial.
4 Steps to Divestiture Success
Preparing proactively for divestiture greatly increases the chances that a transaction will go well. After selecting the asset, group of assets or entity to be divested, the seller should take steps to best “package” the divestiture to maximize its attractiveness to potential buyers. This means being able to:
Support your asking price
You’ll want to present valid and compelling financial data, compiled in a professional and concise report.
Review every aspect of the asset(s) to be divested (financially and operationally)
This review should result in a clear understanding of the capabilities associated with the asset, including which are going to transfer with the divestiture and which are not. This decreases the risk of an unexpected issue derailing the divestiture strategy.
Build a well-organized data room
You’ll need it to support the financial, tax, legal, information technology, insurance, human resources, contracts and other key items of interest for the buyer to inspect. The documents provided in the data room should reflect both the form of the transaction (i.e., asset or stock) and the specifics of which operational components are going to be part of the deal.
Communicate your company’s story effectively
Share your thinking about which aspects of the asset you perceive as most critical or valuable and how you will deliver them as part of the asset. Keep in mind that the buyer might see value differently based on having needs or priorities that are not the same as yours.
Buyers expect their due diligence to be much more extensive and multi-faceted than it used to be. While due diligence may have once focused narrowly on financials, today it’s also likely to entail examining tax, information technology, legal, human resources and insurance-related information. Sellers should be prepared to respond to these inquiries in a timely manner and in a way that minimizes the chances of an unexpected revelation torpedoing the divestiture.
Investing in professional consulting services will allow you access to the expertise required to uncover previously unidentified issues that could threaten the sale or negatively influence the sale price. Additionally, these services can help you prepare for divestitures with a systemic approach aimed at maximizing sales price. By utilizing experts, you can refocus more quickly on the remaining business units that will continue to grow with your corporate strategy.
We’re Here to Help
Contact Bridgepoint Consulting to talk about how our experts can help you. We offer a full range of Transaction Advisory services from preparing to divest specific assets to crafting a long-term divestiture program to help your business grow strategically. Discover our full suite of services and areas of expertise.
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