FINspeak

(Q) Have you seen any major shifts in the divestiture process since you first started? (e.g. use of virtual data rooms)  

[PH]  Technology, for sure.  You mention virtual data rooms as an example.  I have mixed feelings about them, though.  As a seller I like them because it gives me very good control over access and I can look at usage patterns to see how thoroughly buyers are (or are not) looking at the information.  One can also shorten the sales cycle by having multiple buyers going through the data simultaneously, so they’re great for auctions.  As a buyer there are advantages, too.  One can have more people in more locations go through the information – you can bring in experts to look at very specific things.  But there is also a risk of compartmentalization of the due diligence effort and things falling through the cracks.  While looking through boxes in a conference room is highly inefficient, it does have the advantage of bringing the diligence team physically together, prompting the human interaction that is necessary (in my view) for an effective due diligence effort.  When there is a virtual data room, I suggest the buyer make sure to promote active information sharing and interaction amongst the diligence team.

[BG] Completely agree with Paul’s comments.  I do believe that VDRs accrue more to the advantage to the seller, but offer some efficiencies to the potential buyers.  Also, it’s worth noting that VDRs add cost to the process and there are some situations (such a small transactions or a limited number of potential buyers) in which they may be hard to justify.

(Q) Did you look at any particular firms that you felt really did this right or were excellent in their execution?

[PH]  Interestingly, we heard and read a lot about firms that had well-established acquisition processes, but not much about firms that were really good sellers.  I guess nobody wants to be seen as really good at divesting – maybe that gets back to the stigma around this whole area.  The best thinking we came across came informally - from the expertise of a network of colleagues with whom we worked closely over the years, folks who had done a lot of deals on both the buy and sell side.     

[BG]  We were able through our research to get a sense who the more active divesters are (e.g., GE, Clear Channel Communications, and UTEK Corp.) but were unable to get any real insight into the quality of their processes.  It’s reasonable to assume that those who have very active portfolios, like these organizations, probably have systematized their divestiture efforts, but we saw no tangible proof of that.

(Q) Why is there not more material written about divestitures?

[PH]  You'd think there would be a lot more - these are extremely common transactions - corporate divestitures represent something like 1/3 of all M&A transactions.  I can only guess that some might think that the sell side is simply the mirror image of an acquisition, and there is plenty of literature addressing the buy side.  Perhaps it may also be due to the psychology that sometimes is associated with a divestiture - that it lacks the sizzle of an acquisition. 

[BG] I believe the sizzle factor is an important influence.  The literature, or lack thereof, appears to reflect the attitudes of corporate managers.  As Paul says, there is an apparent absence of appreciation for how different a divestiture is from an acquisition.  When involved in an acquisition, access to the owner of the transaction (generally the operating company CEO) is pretty easy to get and often, in fact, is initiated by him or her.  With divestitures, there can be an out-of sight out-of-mind attitude.  It’s hard to draw a straight line from that mentality to the literature but I believe that there’s definitely a relationship.

(Q) What is next?

[PH]  We just finished collaborating on a second book with Wiley, this one will be on acquisition due diligence.  Earlier, I mentioned the risk of compartmentalization during due diligence, just one of the many things that can go wrong on the buy side.  In our second book, Bill and I attempted to take a holistic and integrated approach, thinking about how M&A due diligence should flow from pre-acquisition planning, and then influence post-acquisition activities as well.

[BG]  Our collaboration has been a very positive experience, but having written a book addressing the sell side and another the buy side, we have no immediate plans insofar as writing is concerned.   We have tremendous respect for the challenges that deal teams face, especially within corporate structures which ask the same individuals to manage M&A transactions in addition to their ongoing responsibilities.  If we do decide on another project, we would stay within the confines of what we know best – offering practical, experience-based guidance for busy professionals.  That’s where we believe we can make the most meaningful contribution.

I want to thank Paul and Bill again for their participation with this interview and best of luck on their upcoming book release.