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Determining a Divestiture Approach

This play is focused on the overall divestiture approach, a roadmap and the impacts that need to be identified upfront.

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About the play

This play is focused on the overall divestiture approach, a roadmap and the impacts that need to be identified upfront.

To avoid delays in execution, management teams need to consider the operational, organisational, and other tactical factors associated with the divestiture. Long deal timelines can suggest the loss of critical talent, struggles with internal politics, and diminished operating performance in the target. The longer it takes to divest, the more anxious employees, customers, and investors in the market get.

While speed is important, it also needs to be balanced with the desire for an appropriate premium for the target.  For example, an “asset offload” is primarily about selling as fast as possible and may not get the premium shareholders are seeking.

This play isn’t a one-off exercise. It will need to be run more than once and with key stakeholder groups such as: Technology, Legal, Finance, People and Regulatory. This will help ensure the divestiture approach is understood and agreed from all those involved in the work.


Preparation

People

CEO, Deal manager, Executive Sponsor, Commercial team

Difficulty

Medium

Materials

Meeting Agenda, Whiteboard, Strategy documents

Time

Spend one day or more to prepare materials for a one to two hour play.

Running the Play:

01

Assess the Relative Importance of Transaction Speed

Discuss with the team the transaction speed and agree the relative importance of transaction speed.
Speed – “We must offload the asset as fast possible.”

This is driven by a sense of urgency, most likely to pay down debt or to address working capital issues. The negative impact can result in sub-optimal decisions, lower selling price, less work and visibility on stranded costs, complicated seller/buyer relationships. On the positive side prioritizing speed of execution over everything else can galvanize the executive and team to work the hours necessary to deliver effective solutions to meet the transaction’s tight deadlines. 

High selling price – “We’ll take our time to get the best price.”

This is based on a belief that a premium can be gained from a more rightful owner. Apart from the sale potentially taking longer, the seller will need to search for owners, go through a lengthy bidding process and engage multiple sales scenarios such as an IPO, MBO or PE purchase. Extended sales process can lead to value erosion, uncertainty, competitors taking advantage of uncertain times, and key personnel leaving. However, the process may result in a much higher transaction premium when more competitive bidders are involved.


02

Create a Divestiture Roadmap

Once the speed and pace of the transaction has been agreed, an understanding of the key steps, key activities and decisions is required. This will help define the roadmap for the divestiture.

An effective way to go about doing any divestiture (or large initiative) is to break it up into manageable chunks. A divestiture, like any major initiative, needs to be planned, monitored and controlled as management chunks, phases or stages .These chunks are separated by pre-agreed key events or decision points.

Consider the following phases as a starting point for determining the roadmap.

Note: These phases can be combined as appropriate to fit the particular transaction.

Roadmap Phases



03

Adjust the Approach Based on Likely Impacts

The previous step provides a roadmap approach but doesn’t account for finance, legal, people and technology dependencies. The roadmap needs to be adjusted on what these likely impacts will be. 

Discuss with the team the following potential impacts:  

Technology Impact  
  1. Data Management and Migration

The degree of data and technology integration between the parent and the target will significantly impact the divestiture complexity and transaction timeline.

  1. Data Centres

If the target has a significant part of the parent’s data centre footprint, there will need to be options made available to best ease the transition. A data centre migration can be a large undertaking requiring careful planning and enough time in the transaction timeline for both the Parent and the Acquirer.  

  1. Technology Contracts

It’s common for enterprise software licences and other major technology contracts to be shared across businesses. It is therefore critical to understand the terms of these contracts and how they are used across the enterprise. 

  1. Transition Services Agreements (TSAs) 

 The key decision for executives and the board is the extent to which the Target can be made a standalone operation before sale. A standalone operation is likely to attract higher sale premiums, limits negation to the transaction itself, and shortens the transaction timeline. The work required to eliminate or at least reduce the need for TSAs will have a significant impact on timelines and phasing of work.  

Regulatory Impact 

When looking to divest, it is important to consider regulatory requirements and how regulatory bodies should be consulted with. A divestment roadmap and transaction times will be strongly influenced. Regulatory bodies often work to their own prescribed timelines and early understanding of this will help determine the decision points and how work should be phased. A clear strategy should be developed as to how and when the regulator should be informed. Their final decision can fundamentally impact the value of the divestiture and, even potentially, its viability. 

Key questions:

  • What would be the impact on the divestiture if the regulator isn’t informed, but they initiate an investigation?
  • What is the process and communication protocols with the regulator
  • At what point in the divestiture process is the regulator informed?  
  • Has legal advice been sought to assess the economic impact of the regulator’s decisions?

Human Resource Impact

Organizational design for impacted business units, selection of employees based on the new organization design, and consultation with labour organizations across several countries are the key HR activities that affect timelines of other functions. 

As part of its organizational consultation process, HR must consult with labour organizations on the laws prevalent in the country where the newly created legal entities will operate. The HR team can then devise a strategy for transitioning employees to the newly created legal entities in accordance with local labour laws in the respective countries.

Finance Impact

The finance team needs to set up an accounting and reporting structure for the entity if this doesn’t exist. They will also need to create bank accounts for all the newly created legal entities. Finally, carve-out financial statements for the to-be-divested entity will be required.

Tax Impact

Tax considerations play a role in the divestment approach and transaction timeline. For example, certain tax benefits can only be achieved in a particular financial year. Another possibility is that the divestiture can offer opportunities to improve the on-going tax efficiency of the target, therefore increasing deal value.


04

Revise the Deal Roadmap Timeline

Based on the outcomes of cross-functional alignment sessions, the deal timeline or roadmap is developed that takes into account key milestones and cross-functional dependencies. It is essential to ensure all functions are aligned and in agreement with this timeline.

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