FINspeak

(Q) You write quite a bit about completing the internal sales process for the divestiture target, how can companies overcome that initial inertia?

[PH]  It’s tough to generalize, but I think a psychological obstacle may emerge within an organization if a divestiture is viewed as a failure on the part of management to deliver on the promise of a given business.  If, instead, a potential divestiture is evaluated in context of the organization’s growth strategy, the divestiture can be thought of more objectively - as a way to redeploy capital into a market opportunity that offers better growth and returns.  

[BG] Agreed.  In all divestitures, some managers will be relinquishing turf and some may view it as personally damaging to their professional reputation.  The more you can make the transaction about strategy, the less personalized the decision becomes. 

(Q) Is there a stigma with completing a divestiture from a sense that an outsider has to acquire that asset in order to get value? Sometimes there is just a mismatch or you can unlock that asset in the public market. 

[PH]  Great question and, again, difficult to generalize.  I think that if a given business is not, for whatever reason, seen as part of a corporation’s future growth strategy, it is probably not winning its fair share of internal growth capital and strategic attention.  As one example, there may be additional synergistic acquisitions that, in a different ownership context, could help a given business.  Additionally, the divested business may have been isolated within the corporation’s business portfolio and not benefited from synergy with other parts of the corporation.  The question of how value can be unlocked is probably one of the first and biggest questions that the corporate seller has to field from prospective buyers.  It is a challenge for the selling organization, having just convinced itself why it does not want to own a given business, to help build the investment case for prospective buyers.  This is an area where the expertise, vision, and enthusiasm of the management of the divested business unit can create a lot of value for the selling organization – it’s another reason why I stressed their importance earlier. 

[BG]  This is a good follow-on question to your question about selling the deal internally.  A shift in strategic direction when articulated well can obviate this concern.  Thomson’s shift from print to electronic media is an excellent case in point.  The divestiture of newspapers, textbooks, magazines, and newsletters to focus on electronic databases was recognized by most, both internally and externally, as a reasonable business decision.  And, there were a number of obvious buyers who were strong players in the print sector of the market, and were keen to have an opportunity to expand their share.  Given these conditions, there was not a lot of second-guessing about the decision.  As Paul notes, it’s hard to generalize and the perceptions of observers can vary with the facts and circumstances surrounding any given transaction.  However, I do believe a lot rides on the ability of the seller to properly position the sale in the context of its strategy and to be thoughtful about targeting likely buyers.

(Q) Do you see a sweet spot for divestiture deal size or is it really just a matter of the leadership on the deal team?  

[PH] While the deal team can make or break any transaction, in a divestiture I think a lot is dependent on the quality of management of the unit being divested.  That team, after all, is often what the acquirer is buying - buyers discount what the corporate seller's deal team says - they want to hear from the folks who will transfer with the business.  The divested business management also has a significant operational challenge in terms of disentangling the business from the infrastructure and support services of the former corporate parent after the transaction closes.  In my mind, businesses with more than 100 employees are a good size because it is more likely that there is a whole team to showcase and rely on versus one or two key individuals.  Smaller deals can be simpler in terms of the transaction structure (e.g. doing an asset sale, avoiding expensive and time-consuming audits), but the transaction team may lack the internal management resources to address the operational aspects. 

[BG] Also, the concept of economies of scale is applicable.  The amount of time, effort, and expertise needed for a deal is not proportionate to its size.  Small deals may require as much or nearly as much resource as a larger deal, with clearly not the same pay-off.  Also, it has been our experience that the smaller the deal, the more disinterested senior management.  They just want the deal to be done.  So, I agree with Paul, the 100 employee benchmark is a good one. 

(Q) In your experience, what were the greatest pitfalls in the divestiture process?   

[PH] I think it would be going to market with inadequate preparation – it’s difficult to put the cat back in the bag.  Once a prospective deal is announced, the business is subject to scrutiny from multiple parties – and missteps have potentially significant consequences.  For example, consider a case where a seller decides to announce a divestiture before the completion of the financial audit of the business and instead distributes preliminary, unaudited financial information to potential buyers.  If the audit results in significant adjustments to the financial statements, this can destroy confidence and potentially undermine the deal’s value.  Likewise, if a seller has not thoroughly analyzed the time and costs required to separate the operations of the divested business from that of the corporate parent, it can set itself up for some nasty surprises later on in the sale process.