Strategic M&A Divestments: Unlocking Hidden Corporate Value

For many companies, the process of acquisitions is familiar territory. When it comes to divestments, however, it often remains unexplored. The complexity of divesting a business unit often typically outweighs that of acquiring. Executing a successful divestment, akin to an acquisition, demands a specific set of skills and comprehensive preparation. Being a well-prepared seller implies the ability to foresee potential issues and act pre-emptively to minimise disruption and safeguard stakeholders' interests. 

Navigating the Path to Divestment Readiness

The journey to being divestment-ready goes beyond simply identifying prospective buyers. It encompasses several crucial steps:

1. Conduct a strategic analysis of the business unit earmarked for divestment.
2. Critically examine the underlying motivations for potential divestment and consider any associated adverse implications.
3. Familiarise yourself with the overall M&A market landscape.
4. Undertake a valuation exercise, considering a range of potential outcomes.
5. Investigate potential buyers and evaluate the pros and cons of strategic versus financial buyers.
6. Form a dedicated divestment and separation team.
7. Ensure the completeness and accuracy of information within the scope of buyer due diligence.
8. Develop strategies to mitigate disruption to everyday business operations throughout the divestment process.

Moreover, it's essential to understand that becoming divestment-ready is not an overnight process. Ideally, preparation for a successful divestment should commence 12-18 months before initiating the divestment sales cycle. This enables the divestment team to control the pace and direction of the process. Conversely, a reactive approach to an unsolicited offer from a potential buyer may jeopardise the process.

The Importance of Divestment Planning

In essence, divestment planning involves reviewing, analysing, decision-making and executing actions necessary for successful divestment. It should align with long-term corporate objectives and carry strategic intent. To establish priorities at the early stage of divestment, consider these fundamental questions:

1. What prompts our consideration for a divestment?
2. How should we proceed with divestment?
3. Who are the potential acquirers?
4. What makes the business unit attractive for sale?

Bain & Company found that 53% of senior executives report a clear strategic rationale as the primary driver behind successful divestments.

Identifying the Underlying Rationale for Divestment

The rationale for divestment is a crucial consideration. It helps shape the narrative presented to shareholders, employees, other stakeholders, and most importantly, potential buyers.

Some common drivers of divestment include:

1. Refocusing on core competencies
2. Raising capital
3. Unlocking value
4. Meeting anti-trust requirements
5. Fundamental organisation transformation

Cultivating Sell-side Capabilities

Maintaining a regular cadence of smaller divestments is usually less disruptive than a one-off, large-scale “mega” divestment. Prioritising core business units helps communicate a clear and compelling growth narrative. Forced divestments, on the other hand, may be perceived as a sign of distress. Adopting a portfolio management-led approach to evaluating potential divestment candidates can be facilitated by a dedicated sell-side team.

Criteria for Evaluating Divestment Candidates

When evaluating potential divestment candidates, consider the following:

1. Strategic Alignment - Does the business unit align with the company's overall strategy?
2. Financial Contribution - What is the business unit's financial contribution, and what potential does it have for future growth?
3. Competitive Landscape - How does the business unit fare in the competitive market, and what are its unique selling propositions?
4. Assets - What tangible and intangible assets does the business unit possess?
5. Customer Base - How substantial is the customer base, and what is its potential for growth?
6. Risk & Compliance - What risks does the business unit entail, and is it compliant with regulations?
7. Impact of Divesting - How will the divestment impact the remaining business units and overall organisation?

Conducting a Divestment Readiness Assessment

A divestment readiness assessment, whether performed internally or by external experts, can provide valuable insights to shape the divestment strategy. The collected information can inform the best governance structure, identify potential value-creation opportunities, determine the ideal timing for the divestment, and anticipate challenges that may arise during the process.

This assessment typically covers the following areas:

1. Strategic Assessment - Evaluates whether divestment aligns with the organisation’s overall strategy and if it creates value for stakeholders.
2. Financial Assessment - Analyses the financial impact of divestment, including any potential tax implications.
3. Operational Assessment - Identifies any operational issues that may arise from the separation, such as shared services or supply chain complexities.
4. Market Assessment - Assesses the attractiveness of the business unit in the current market context.
5. Legal & Compliance Assessment - Ensures the divestment will not breach any regulations or contractual obligations.

Manage Stakeholder Expectations

Clear and consistent communication with all stakeholders is paramount throughout the divestment process. This includes internal stakeholders (employees, board of directors) and external stakeholders (investors, regulators, customers, suppliers, etc.). Failure to properly manage stakeholder expectations can lead to unnecessary complications and may negatively impact the divestment's perceived value.

Divestment Execution

Once you've prepared thoroughly, you can proceed to execute the divestment. This includes setting up a data room, preparing marketing materials, initiating buyer discussions, negotiating deal terms, managing due diligence requests and navigating legal and regulatory hurdles. To keep the process on track and ensure a smooth execution, it's essential to maintain momentum, proactively manage potential issues and communicate transparently with all parties involved.

Takeaway

Mastering a divestment strategy is a nuanced and complex undertaking, but it's an essential capability for businesses aiming to maintain a streamlined and high-performing portfolio. From conducting strategic assessments to managing stakeholders and executing the divestment, each step requires careful planning, insight, and strategic decision-making.

• Getting divestment-ready takes time and goes well beyond lining up potential buyers. Consider planning 12-18 before going live to market;
• Be sure you understand the driver(s) of the divestment and think about the divestment story (how to frame the selling of a business unit);
• Take a portfolio management approach to business units and build sell-side capabilities via establishing a dedicated divestment and separation team; 
• Consider a broad range of assessment criteria when it comes to evaluating business units as potential divestment candidates; 
• Consider conducting a divestment readiness assessment to help shape the divestment strategy.