US companies considering selling a subsidiary or portion of their business are increasingly doing so for strategic reasons rather than to improve their financial situation, according to a recent Deloitte survey that involved about 150 executives from companies of all sizes.
In 2010, the last time Deloitte conducted the survey, 46% of respondents said financial needs were the primary driver behind divestitures. By late fall of 2012 that number had decreased to 37%.
Eighty-one per cent of the respondents said getting rid of a non-core asset was one of the two most important reasons for selling a business, up from 68% in 2010.
As attention shifts from meeting financial needs to meeting corporate strategic goals, Deloitte mergers-and-acquisitions specialists said, executives need to make sure they are taking all the necessary tactical considerations into account.
“Using divestitures to advance corporate strategy demands careful financial analysis to prepare a deal for market, a clear communication strategy for disseminating divestiture plans to stakeholder groups, and a recognition of the need to be sensitive to employee morale during the process,” the report says.
The survey results suggested US companies could do better getting ready for divestiture deals in 2013. Deloitte recommends the following:
Develop a detailed separation plan. To raise the value of the transaction and close the deal faster, sellers should prepare carefully approaching a sale, including from the buyer’s perspective. The most important factors in picking a buyer were the highest price (76% of respondents) and speed and certainty to close (54%), according to the survey. But only 55% said that performing detailed pre-sale due diligence is a key part of bringing a deal to market.
Keep morale among employees up. To execute the transaction, employees must stay motivated and companies need to retain executive talent. Ninety-three per cent of survey respondents said keeping morale up amongst employees in the for-sale business is a major challenge. But being aware of the challenge does not mean companies do a good job addressing it when they plan a divestiture. Only 46% of the executives polled said they established a retention/incentive plan for the management of the business for sale.
Consider cross-border deals. A global perspective can result in more bidders and a higher deal value. The survey results confirmed that multiple, competing bidders are most likely to boost the deal value. Forty-four per cent of the respondents said the value of their most recent divestiture was higher than expected because of competing bids. Executives of US companies have historically preferred selling to domestic buyers, and 59% of survey respondents said they still do. But that is down from 70% in 2010.
Learn to manage the costs of transition service agreements. More than half of the executives surveyed would prefer to avoid transition service agreements (TSAs) or do not provide them, but TSAs can be strategic tools to close a deal. For example, as sellers plan for the services they will agree to provide to a buyer, sellers may want to carefully think about which services they want to deliver and for how long, the Deloitte M&A specialists suggested. Finance/accounting and IT services are the most frequently offered in TSAs.
Related CGMA Magazine content:
“M&A Expected to Increase, But Economic Uncertainty Could Delay Deals”: Mergers and acquisitions of small and midsize companies are expected to increase in the coming year, but financing and valuation issues could limit deal volume, a recent survey of M&A advisers indicates.
“CFOs in Holding Pattern As Economic Uncertainty Continues”: Economic uncertainty has made financial executives reluctant to make the significant investments in hiring or mergers and acquisitions that would spark strong growth. The fiscal cliff and higher health-care costs concern CFOs in the United States, while European woes include the possibility of a request for a bail-out by Spain.
“Five Things You Must Learn About the New M&A Landscape”: Accountants and other finance professionals are increasingly taking on more strategic and risk-management responsibilities, particularly when it comes to mergers and acquisitions. Find out what skills you should learn for the new M&A landscape.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.