Lessons Learned from Large Scale Divestitures
Listen to the discussion about this topic from the M&A Science Summit here.
A divestiture is often seen as far less exciting and glamorous than a traditional acquisition. There are many nuances that make divestitures complicated, but they can be a powerful tool in gaining value. Here we pull advice from practitioners with 1,000 deals behind them so you know specifically what to do and what not to do when it comes to divesting.
Lesson 1: Consider the following 6 before divesting:
- Separation management - The entanglement that comes with a divestiture is complicated; therefore, separation divestiture planning and developing the optimal divestiture strategy for this engagement is key.
- Day 1 - Remember, Day 1 is not the same in a divestiture as it is with a traditional M&A deal. With a divestiture, there is a legal Day 1, a separation Day 1, and the Day 1 when you are publicly traded.
- Transition Services Agreement (TSA) - TSAs are common in divestitures as the parent company and the spin off depend on each other in various ways (oftentimes, this is related to payroll for example). It is important for both sides to remember that TSA is not a revenue stream (though it should be its own work stream), but rather it is simply necessary to avoid business disruption. More on TSAs can be found in lesson 5.
- Customer Impact - Customer impact considerations hinge around which customers will go with each group. This is done for a variety of reasons, one being so communication plans can be generated, which we will discuss further below.
- Human Capital - The right employees create value in companies; therefore, human capital is key in any deal. Especially with divestitures, HR will play a salient role, which we look at in more detail below.
- Stranded Cost - Stranded cost planning must be done, or the price paid will be steep. Consider dis-synergies both operational and financial (often related to tax purposes). Depending upon the size and complexity of the deal, you can work on these separations by function, the idea, of course, being subtraction to create value.
Lesson 2: Bring HR in early and for the long haul
While much depends upon the company makeup and deal type, it is generally best for HR to sit with Corporate Development and work with the leads in Corp Dev early on. More specifically, this is done because the people aspect of the divestiture is vital, especially when it comes to stranded costs.
Furthermore, HR should help inform the deal structure and then continue as part of each deal phase moving forward - from setting up the data room, to meeting with potential buyers, and to reviewing paperwork. Ultimately, this best practice means the HR lead might be on a deal for a year or longer, but this commitment makes dis-entanglement much easier.
Lesson 3: The SMO lead flies the plane, the SMO office is air traffic control
Nominating a SMO lead with integration experience is wise because you want to think of this lead as the pilot flying the plane. If the pilot does not know what he or she is doing and is not working with air traffic control (i.e. SMO office) to successfully land the plane (i.e. deal), a crash will occur and value will be destroyed.
Specifically, SMO should examine risks, which generally fall into three categories: (1) business risks (2) execution risks and (3) transactions risks. It is a common error for risks (and interdependencies) to be missed so the SMO must do this work carefully because it is the glue that bonds strategy and execution.
Lesson 4: Communication must be specific, planned for early, and not left solely to HR
Communication cannot only be owned by HR; in fact, it should be its own workstream as there are so many individuals and groups that must be communicated with. For instance: customers, suppliers, stakeholders, and employees. Each group must have a specifically tailored communication plan.
The plans should spell out exactly what is changing for the person/group. When necessary, NDAs will need to be prepared. Clearly, communication is the cornerstone of a strong divestiture execution - so how should this workstream be shaped? There are generally three ways the communication workstream is shaped during divestiture: SMO governed, HR facilitated, or function led.
Lesson 5: Go granular when using a TSA
As mentioned previously, TSAs are very common with divestitures and avoid disruptions to business. You must go granular when discussing the boundary conditions for ending the TSA. Certainly, it should be a mutual goal of both sides to get off the TSA (to encourage this, sometimes escalated fee schedules are put in place). Whatever is missed in the TSA often then goes into a Good Faith Agreement. Sometimes it helps to bring in a neutral party here.
Lesson 6: To Generate value understand the C-suite’s goals
Be sure you understand what the Board or C-suites goals are for the divestment. There is no substitute for aligning with the overarching goal of the divestment. Is the pivotal point customer, channel, brand, or product related? Once you know this, you want to rally everything else around it to truly create and extract value.
Lesson 7: Recognize the red flag of overcommitting and under delivering
While there are a plethora of potential red flags, one the practitioners we spoke with specifically noted was the tendency to overcommit and undelivered. This shows itself when a workstream plan with dates and milestones is developed, and these dates are not hit, meetings are missed, work is not thoroughly done and completed on time. People tend to believe a missed date can easily be made up, but generally this is not a good sign nor does it bode well for extracting value.
Lesson 8: The role of technology varies depending upon which side you’re on
Technology is one of the most complex aspects of divestitures. The role it plays varies greatly if you are on the buy-side or the sell-side. Over the last few years, the theme surrounding technology in divestitures has been “consolidate,” which tends to lead to entanglement and interdependencies, which drives up complexity.
From the seller’s perspective, you have to be focused on stranded cost - you do not want to disrupt current operations as the seller. From the buy-side, you are less concerned with stranded cost and more concerned with establishing a new environment.
Divestitures provide an opportunity to create value for shareholders and customers, but your actions must be thoughtful, methodical, and aligned with your overarching deal goals in order to realize this value. While they certainly should not be avoided due to their complex nature, divestitures are not simply integrations in reverse - they have their own best practices and specific steps that must be followed to achieve optimal results.