This play is focused on the divestiture rationale and the objectives it is intended to achieve. As with any major initiative, a divestiture requires careful preparation in terms of internal time and resources, what’s required to make the sale attractive from the buyer's perspective, and what can be done to increase transaction value and reduce time-to-close.
It is therefore critical there’s a clear rationale and set of objectives to the divestiture for it to be a success. Moreover, it requires careful financial analysis to prepare a deal for the 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.
Note: this play may need to be run more than once to ensure deal objectives are fully understood. For example, it can be run with corporate development staff, followed by sessions with legal and then finance.
CEO, Deal manager, Commercial team
Meeting Agenda, Whiteboard, Strategy Documents
Spend one day or more to prepare materials for a one hour play.
Agree with the participants the divestment rationale. Put more simply, explain the ‘why’.
The most common reasons for a ‘why’ a divestiture is being planned as follows.
Meet antitrust requirements: Due to antitrust laws, government regulators may require a company that operates in an industry without much competition to divest or separate itself from a business unit in order to proceed with an M&A transaction that would further limit competition in the industry.
Agree with the participants the exit strategy. An exit strategy may be achieved through multiple options. Types of exits may include and are not limited to:
Sale to strategic buyer
Strategic buyers are operating companies that are often in the same industry or business as the “business unit” being sold. These buyers can be competitors, suppliers, or customers of the selling organization. The primary objective for a strategic buyer is to seek targets whose products and / or services can be quickly integrated with their existing operations.
Sale to a financial buyer
Financial buyers are typically companies that are focused on a return that can be achieved from improving operational and financial performance within a certain period of time. Often, financial buyers are not focused on integrated businesses, but rather the value that can be achieved from a sale at a later date. A financial buyer could be a PE or turn-around specialist.
Partial sale of business unit
With a partial sale, usually there is a need for a financial injection that can help the business unit expand. With respect to a Divestment, a company may seek this option as the first step within a larger exit strategy.
Management buyout (MBO)
An MBO is a transaction where the company’s management team purchases the assets and operations of the business unit from the larger parent company.
Leveraged buyout (LBO)
An LBO is a transaction where a financial sponsor (often a private equity firm) acquires the business unit through leveraging bank debt. LBOs may take the form of a Management Buyout (MBO), where the company’s management team purchases the assets and operations, Management Buy-In (MBI), where the external managers purchase assets and operations, as well as several other forms.
This strategy focuses on the parent company creating a new legal entity that results in the business unit becoming a new subsidiary and then IPOs while still retaining parent company management control.
When a parent company begins to realize that a business unit may be worth more as a separate entity than with the parent company, a spin-off may be the most likely Divestment option. This transaction allows for creation of an independent company through the sale or distribution of new shares of an existing business unit.
This strategy is typically not the first option for organizations and is primarily employed when a company becomes insolvent. Within a liquidation, the parent company will close down the business unit and sell off or redistribute assets, allowing for the proceeds to be applied toward repaying creditors.
Agree who the most likely buyer of the business will be.
Financial buyers are usually investors interested in the cash flow generated by a business and future exit opportunities. Their goals may include growing cash flow through revenue enhancement, expense reductions, or creating economies of scale by acquiring other similar companies. Their exit plans may include an IPO (initial public offering), where the business is “taken public” (hopefully at a higher multiple of earnings than paid at acquisitions), or selling the company at a future date. The aim of the financial buyer is to have a near or completely stand-alone operational entity by Day 1.
Strategic buyers are interested in the degree of fit into their own long-term business plans. Their interest may include growth in customer, new geographic markets, product lines or by enhancing some of its own key weaknesses (technology, marketing, distribution, research and development, etc.).
Strategic buyers are often willing and able to pay more for a company than financial buyers for two reasons. Firstly, strategic buyers may be able to realize synergies quickly through economies of scale and by eliminating duplicate functions. Secondly, strategic buyers are generally larger companies with better access to capital. The aim of the strategic buyer is to integrate the carved-out entity eventually, but in the interim accomplish Day 1 by logical separation.
With the participants in the room, confirm ‘why’ the divestiture is necessary, ‘how’ it will be performed, and ‘who’ is the most likely buyer.
With support from the CEO and commercial team, this will help define the deal strategy, delivery of board papers and how the divestiture should be organised and run.