Corporate divestitures have become an increasingly important part of the merger and acquisition landscape. Currently, they account for more than 50% of middle-market transaction value.
Divestitures often are thought of as a sign of weakness, occurring only when the parent company is shrinking and market share is on a downward trend. This perception is fueled by the fact that many take place as a last resort for a failing operation.
In reality though, divestures frequently happen because a product line or business unit is simply no longer core to a company’s mission. And, if approached proactively, divestitures can create significant value. They can help sharpen a company’s focus, actually enhance growth opportunities and, ultimately, offer tremendous potential to a buyer.
Retaining non-core units can divert precious invested capital, time and management attention, as well as confuse customers and investors. This sets the stage for corporate complacency, which can lead to long-term value erosion. However, a business owner or board of directors can avoid this situation.
According to the McKinsey Corporate Performance Study, companies employing proactive divestiture programs yielded 30% better returns over a 10-year period than companies divesting reactively.
So, how can you proactively evaluate your divestiture needs? The answer is to consistently and objectively inspect all your business units and regularly ask some key questions, such as:
* Is your business unit or product line a market leader?
* Is it growing market share?
* Are financial returns competitive?
* Does it add value to the company’s overall strategic objectives?
* If it can’t be improved, why should it be subsidized?
If your responses indicate that something is non-core or might be worth more to someone else, it could be time to divest.
Four main areas must be considered for any divesture undertaking: financial, people, logistics and legal agreements.
Financial
Determine dedicated, shared and allocated resources. Then decide what should and shouldn’t be included in the sale. Dedicated resources typically are part of the transaction. Shared resources may or may not be included. Allocated resources are almost always excluded.
Also, pay attention to inter-company pricing. Be sure you clearly understand pricing policies and are willing to make adjustments as necessary. Another thing to keep in mind is that there most likely won’t be audited statements for a unit or product line. This can affect the amount of bank financing available for a prospective buyer.
People
Sometimes companies, especially larger ones, have an "enrollment" process for employees who need to be aware of a divestiture. This often involves the employee signing a non-disclosure agreement and receiving a "stay-put" incentive package.
Morale can go down when employees learn a business or product line is for sale. To maintain a positive attitude within the workforce, try to keep a pending sale confidential for as long as possible. But once it’s official or the word is out, consider making an immediate announcement highlighting the positive aspects of new ownership. And, always tell the truth.
Logistics
Be prepared to provide the necessary data about the unit or product line. Collecting the information can be a challenge, and it is helpful to arrange the data in advance. Most qualified buyers also expect to meet with management, and a solid management presentation can help you achieve the best value possible.
Legal Agreements
Divestures generally require special legal agreements that cover how shared services such as accounting and IT, or specific aspects of manufacturing and/or sales and marketing will be handled during the transition period. Contracts also may be required for use of a recognized trade or brand name.
If inter-company purchases or sales are high, you should consider having a supply agreement in place. And, finally, to avoid any surprises, spell out the specific assets and liabilities that will be part of the deal.
Once a divestiture is completed, your company must refocus on core strategies as well as redeploy human resources and capital to drive enhanced market position. Renewed focus creates value, and divestitures are one way to gain this strategic opportunity.
Doug Marconnet is a director and Linda Mertz is a managing director at Mertz Associates Inc., a Milwaukee-based middle-market investment bank specializing in mergers and acquisitions (www.mertz.com).
May 28, 2004 Small Business Times, Milwaukee, WI
