Five ways to a better divestiture

Strategic divestitures are on the minds of global executives. Companies are shedding parts of their businesses, or considering doing so, not so much because they need the cash but instead to advance a long-term strategy.

More than three-quarters of companies plan to accelerate their divestment strategy during the next two years, according to a global Ernst & Young survey, but they might be wise to take a step back before diving into a deal.

The survey shows that 58% of companies said they would ramp up divestments but were concerned about the impact of a slow- to no-growth economy.

That uncertainty is contributing to companies placing a greater emphasis on more rigorous divestment preparation – 50% of respondents said the level of preparation for divestment had increased over the past two to three years. Stakeholder scrutiny on the buy side and sell side were also on the minds of companies – 47% said buy-side stakeholder scrutiny had increased, compared with 23% saying it had decreased. Forty-five per cent said seller stakeholder scrutiny had increased, compared with 21% seeing a decrease in the past few years.

The report shows that just 18% of companies complete deals significantly above price expectations. More often than not, companies are near or below price expectations – 73% of respondents fell into that category.

The report lists five practices that can help maximise divestment success. These processes were often mastered by the high-performing group:

Conduct structured and regular portfolio analysis. Fifty-five per cent of high performers have a regimented review process to analyse whether their assets are contributing to strategic goals or if the capital could be better deployed elsewhere.

Consider a full range of potential buyers. Don’t limit yourself to suitors from the same region. The more bidders, the more likely a company is to sell at a higher price. Forty per cent of respondents said that buyer competition helped increase divestment value.

Articulate a compelling value and growth story for each buyer. Buyers are sceptical in general, but especially so now when a company wants to rid itself of an asset. Therefore, sellers must clearly articulate their reason for selling, including tailoring a presentation for how that asset could benefit the buyer in the long run.

Prepare rigorously for the divestment process. Preparation in mergers and acquisitions is paramount. Among companies looking back on their most recent divestment, 54% rated themselves highly on any one aspect of the process.

Understand the importance of separation planning. Companies considering a divestment must assess the costs involved in separating an asset – both the one-time costs and the impact on business continuity. One aspect of separation planning includes negotiating transition services agreements (TSAs), which was rated by 40% of respondents as becoming more complex over the past few years.

Ernst & Young surveyed 567 global executives in October and November of 2012; 73% worked at companies with annual revenue of more than $500 million.

Related CGMA Magazine content:

“What to Consider When You’re Planning to Sell Part of the Business”: US companies considering the sale of a business are increasingly shifting their focus from meeting financial needs to meeting corporate strategic goals. But not enough are following the tactical considerations necessary to get the highest price or close the deal fast.

“M&A in Your Future? Plan for Accounting Integration”: European finance executives who have taken part in recent mergers and acquisitions stress that planning is critical for the integration of accounting functions – before the deal is complete.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.