Text Version of the Interview
Toby Tester is an M&A consultant and project manager with BTD who has designed operating models, carve-out strategies and post-merger integration plans.
With over 20 years of experience in delivering strategic, financial and operational value for M&A deals, he is an expert in his field and has worked on integration management office development.
Based in Australia, he’s worked with a number of organizations from around the world and is a part of BTD Consulting, a group of M&A professionals that has representatives in the UK, Germany, Asia and the United States. He and his team provide divestiture services, as well as acquisition-related services.
Toby also wrote an article, The New Divestiture Playbook, which was written based on his experience on the buy-side and working with sellers who are divesting an asset.
What I have noticed is that sellers are not always best positioned to set their asset to make it available for sale.
In other words, they could have done more to make the business ready and a sellable asset in order to make it as attractive as possible as a potential business that could provide a future profit for the purchaser.
What is frequently overlooked is how important it is to make sure that the business can stand as best as possible on its own without the need for transitional services once the deal completes.
How the M&A Industry Views Divestitures as a Strategy
I don’t think divestitures really is a strategy, while acquisitions certainly are.
Divestitures are frequently seen as an afterthought and executives might find themselves holding onto assets for too long, possibly because of concerns related to corporate earnings or failures of some kind. As a result, what frequently happens is that corporate earnings get diluted and become a drag on overall profitability.
When that happens, organizations confine themselves by putting a business on sale, wanting it over and done as fast as possible. However, what they are actually doing is trying to get rid of the asset quickly, which is not the best way of going about it.
In these cases, it is important to take a step back and think about how can they put the best step forward and make the business as an attractive business as possible to potential acquirers.
Determining if a Business Unit is Non-Performing, or just Not a Strategic Fit
The traditional view is to essentially not think of divestitures in the same way as acquisitions.
I think of divestitures simply as another way of profiting.
The fundamental premise is to extract as much value from the sale of the business as possible and there is a number of steps regarding how to go about that.
It is important to think about how to go about attracting more, getting more or at least communicating more value to potential acquirers, which is a path of creating more value, instead of choosing the path that will lead to getting rid of the asset as quickly as possible.
Creating a Strategy to Maximize the Value of the Asset
The business needs to be as attractive as possible to penetrate the purchases and therefore it is a win-win on both sell-side and buy-side. The seller can get an extra premium by making a little more effort in terms of presenting the business to potential acquirers.
This is also beneficial for the acquirer side, as it gives the tools by which they can profit themselves once they take over the business.
Discovering the ‘’Buried Treasure’’ of a Divestiture
‘’Buried treasure’’ is just a term.
There is a fundamental premise that someone who owns an asset is frequently unaware of what makes their business unique because they are so close to it. This is why it is important to know what a potential purchaser might be interested in, in terms of the business, and then communicating that back to a potential buyer.
There are certain capabilities, aspects of technology and people that are a critical part of the value of a business. Communicating this to a potential buyer is important in order for them to become aware of where this value resides.
Essentially, there is a two-step path that I suggest to be taken.
- The first one is a value preparation step, which is about setting up proper governance around the divestiture, making sure the project is well organized with the appropriate team and then defining the way the business works in an operating model sense. This matters because it is when diving in the operating model when parts of the business that have value in them can be pieced together.
- The other part of the path is the value communication exercise, which is focused on articulating what the business value drivers are and how can these values be mapped to a potential buyer. It is about assessing what the potential value is and where the options might be to improve it even further, and this is what attracts buyers. It is about controlling the wholesale agenda so effectively, that it promises being on top of it at all times. The focus is on controlling the narrative, controlling the process and controlling the key messages so effectively that potential buyers get to listen, understand and hear out what is it that a business actually provides.
How to Create an Operating Model
I believe that to do an operating model effectively, what needs to happen is to break the business down. Doing operating analysis is time well spent.
It is not only about understanding what the organization structure is like but it is also about breaking down for potential acquirers, the actual value chain operation, braking down the technology components of the business, the supply arrangements and also about where the assets are located.
Operating model exercise is an effective way of breaking the business down so people can have clarity as to how this business operates and it also reduces the number of questions during due diligence.
The Steps of Sell Side Diligence
We know that potential buyers will do their own due diligence so they can evaluate what they want in the buy, but it really helps if the seller does the same thing because it does shape the ultimate compensation.
Getting ahead of the game before the sell side due diligence reduces the surprises that can occur during the transaction.
Sell-side due diligence also increases the size of the pool of potential buyers and reduces the threat of buyers trying to negotiate the price down, which is in its essence effectively controlling the agenda for the sale.
The other big thing about sell side due diligence is that it shortens the time buyers need to spend on their own due diligence. The buy-side will naturally do their due diligence, but it is helpful to cut that time down as much as possible.
Defining the Value of Divestitures
The financial aspects of divestiture are critically important, but I think it needs to be supported by an operational understanding of the way the business delivers value to customers.
The business value definition exercise is meant to communicate and educate.
It is important to break the business down to its nuts and bolts and try to dive into important questions such as who are the suppliers, what are the locations and describe the value chains.
- What are the skill groups that are used in the organization?
- What is technology like and how people remunerate it?
- What are the policies and procedures?
All these elements should be brought together into an operating model view, so it looks visually strong and represent how the business delivers value, be it graphics, pictures or anything else that helps present it.
That is the buried treasure. The buried treasure is there, and this process is only about uncovering it, effectively brining it out, defining it, communicating it and educating potential acquirers as to what is it about the business that makes it unique.
It is simple, but a much-needed exercise, as explained in The Divestiture Playbook.
The Changing Landscape of Divestitures
I have been reading that divestitures are going to be increasing in the years ahead. And I think it is because people are now savvier in terms of looking at their balance sheets, their business models which allows them to try to find out what they can do to streamline operating models more effectively.
84% percent of companies plan to divest within the next two years and also there are surveys that have been done that indicate an increase in this.
I think it’s partly due to trade wars that are happening, uncertainty about tariffs and geopolitical concerns. Each one of these things gets organizations to think about streamlining their operating models so that they are more agile, more focused and ready to meet potential turmoils in the economy in the years ahead.
Divestitures Maturity Over the Next Decade
I think people will start seeing divestitures maturing because they will see it more as a value-creating opportunity, just like acquisitions.
Generally speaking, with respect to acquisitions, corp development specialists are getting savvier. In other words, they have their playbooks, they understand the risks, the exercise, and they are being very professional in terms of the steps they take.
They have their processes mapped out and responsibility is defined so they can manage it appropriately.
The same will happen with divestitures.
This means that, instead of being an afterthought, divestitures will be perceived as value-creating opportunities.
This will include going through steps I mentioned before, which is preparing the business for sale and then communicating the value of it. I believe there will be more playbooks that offer guidance to both buy-side and sell-side.
When a Divestiture Goes Wrong
There was a situation where I was working on the buy-side and we were looking to purchase a digital business that had a lot of interesting technology and certain capabilities that drew attention.
However, the seller suddenly went down the path of carving the business out in a legal sense and to a financial sense to a certain extent as well, but the business was still operationally intact with the parent firm. This caused concern because the issue was that they couldn’t quite see where the IP was as it wasn’t well separated.
The seller was very keen to sell the business, but they did very little in terms of setting the business up for sale which resulted in the sale not going ahead since the buyer didn’t have enough comfort to confidently and safely purchase the business.
There is always a level of transitional services, but that needs to be minimized, which is something this seller didn’t do, which resulted in losing the sale.
TSA’s Arrangement & Divestitures
When it comes to divestitures, seventy-five percent of all divestitures have a TSA arrangement of some sort.
With regards to the transitional services agreement. I think the sell-side should always operate from the perspective of asking how can they make it as little and as simple as possible, and this is essentially about carving out as much as possible knowing that some aspects can’t be separated fully.
I suggest that, when it comes to transitional services, it is always vise to start early and prepare transitional service agreement upfront. It should be viewed as a part of the whole price-value proposition, instead of as an afterthought.
One of the challenges when it comes to traditional services is that it puts a seller in a position where they are providing services to an external organization and a lot of sellers are inexperienced with this.
There is a need for good processes, good quality control, and appropriate governance to make sure nothing goes off the rails once the deal is done.
The buyer and the seller need to establish a professional, amicable relationship post-deal while the TSA itself should be robust and make the responsibilities of each party clear upfront. It is during the carveout that TSA needs to start shaping.
Additional Divestiture Tips
I would say an important tip is to take a step back and think in terms of what a buyer might be looking for
What would make a buyer potentially interested in this business?
Divestitures also need to be viewed as a value-creating opportunity and there always needs to be proper governance around it. Get the team involved, get them interested and get them excited. Essentially, a lot of it comes down to having the right mindset.
Ten years ago, I was working on acquiring a small business from another organization where there was a transitional service agreement associated with it.
The business was successfully sold, the deal completed and then the transitional service phase came into play. It would take around three months period before the TSA would finish, but the seller wanted to work on their data center and they started retiring a few servers and decommissioning the few boxes.
Unfortunately, during this process, they took out the servers that ran the core applications for the business they had sold, which caused a great loss of money.
In other words, they had deleted the technology that was being transitioned across. Fortunately, they had managed to recommission the servers and put them back together.
In this episode, we had covered the topic well in terms of maximizing value from divestiture and looking at it as a positive, transformational process.
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