Don’t Let Divestitures Spin You Off Course
Three ways to prepare for a successful corporate divestiture
In today’s economic environment where financial and strategic buyers are scouring the planet for out-sized returns, corporate divestitures continue to be a popular and effective way for public and private companies to unlock hidden value.
The decision to divest can be driven by many factors, such as seeking a competitive position in the market, streamlining core operations, paying down debt, sector consolidation, staving off unsolicited buyers, or increasing shareholder returns. Regardless of the underlying factors, here are three ways companies can prepare for a successful divestiture.
1. Prune to flourish, not to heal
The best companies in the world “prune” their businesses through divestitures to ensure maximum return to investors while maintaining the quality of products and services delivered to consumers.
Proactive companies yield the maximum value and shareholder return when executing a thoughtful divestiture program, in addition to a sound acquisition strategy. The market is adept at identifying poor performance; the same is true when a company is trying to exit a business as a result of necessity or shareholder activism because the market is aware and punishes those companies that are reactive instead of proactive.
2. Identify the ideal transaction structure
Once a company decides to exit one or more of its businesses, it should determine the ideal form of the transaction. The most common forms of divestitures include:
- Trade sale: This form of divestiture occurs when a separated business is sold to an independent buyer. Buyers might include: (i) strategic buyers, typically corporates that believe the divested business will complement existing businesses or create operational synergies or (ii) financial buyers, typically private equity firms that see value through opportunities such as revenue growth, margin improvement, EBITDA multiple growth and/or improved market share.
- Equity spin-off: An equity spin-off involves a pro rata distribution of the stock of a carve-out business to the parent company’s shareholders resulting in the carve-out business becoming an independent, standalone company. Often, in an equity spin-off, the carve-out business raises new debt and pays a one-time dividend to the parent that then may pay a special dividend to shareholders and/or pay down existing debt.
- IPO of carve-out business: The IPO of a carve-out business occurs when a parent company carves out a subsidiary from its operations and offers securities in the carved-out subsidiary to the public. Typically, the parent only offers a minority stake (20% or less) of the equity of the carve-out subsidiary in order to retain the ability to spin off the remaining interests to existing shareholders at a later date on a tax-free basis. IPO carve-outs are generally undertaken to monetize value in a subsidiary while still retaining control and an interest in the future value of a subsidiary.
3. Develop a single source of truth
The financial information needed to facilitate a divestiture is often complex, non-linear, and quintessentially “high-priority” for each requesting party. Therefore, it is crucial for management to have at its fingertips a “single source of the truth” to ensure accuracy of the financial information needed by all requesting parties both inside and outside the organization.
Financial information needed to facilitate a divestiture (be it a trade sale, spin-off, or IPO) often includes:
- “Deal-based” financials for pitchbook, diligence, and/or financing purposes
- Support for capital markets offering and/or listing
- Tax/legal entity basis to identify tax impact, facilitate a private letter ruling, as well as support dividend and debt capacity for the divested business
- Discontinued operations analysis and pro forma impact for parent company reporting
- Closing balance sheet on date of separation for net working capital purposes and ongoing parent company reporting
- Opening balance sheet for divested business
Competing management priorities and the fact that many ERP systems are not equipped to easily handle disparate data requirements can further exacerbate divergent financial data needs.
When considering a corporate divestiture strategy, the risks, rewards, and value drivers can vary greatly depending on the transaction structure. The road from the initial decision to divest to the closing date of the deal is often marked by unanticipated twists and turns. Riveron’s divestiture services leverage best-in class data analytics, methodology, and technology.