How a Proactive Divestiture Plan Can Propel Your Strategic Growth
A divestiture strategy enables your firm to maximize gains from divesting assets that no longer perform at high levels or do not align with your core business. Your business can increase cash on hand while improving cash flow and ROI because underperforming units no longer require support. Shareholders can gain value.
Unfortunately, divestitures are not pursued as fervently as M&A. This may be because, in the past, companies performed most divestments under duress instead of viewing them as opportunities to increase corporate value.
The Harvard Business Review states:
One hundred dollars invested in the average active manager in January 1990 would have been worth $459 by the end of the decade; that same $100 would have grown to only $353 if invested in the average passive manager.
Corporations that pursue an active divestiture strategy outperform those that don’t. Why?
Because when executives wait until divestiture is a necessity rather than an option, the result is hurried divestments and reduced asset values. Companies using an active divestiture strategy can shop for buyers and time their sales to favorable market conditions, maximizing returns.
Exploring the three key divestiture stages will give you a broad view of the path a successful divestiture strategy pursues.
What Is a Divestiture?
Divestiture is the action taken by a company to dispose of assets by sale, exchange, bankruptcy, or closure. The asset could be a business, service, product line, or real estate. For example, software companies often divest mature apps to focus on newer ones with higher growth potential.
Types of Divestitures
There are four main types of divestitures: sell-offs, split-offs, spin-offs, and equity carve-outs.
The parent company sells a business unit or an asset to another company to eliminate underperforming business units, increase cash on hand, and improve cash flow. Trade sales can be the easiest type of divestiture and are the most popular. However, proceeds can be subject to tax.
The parent company continues business while spinning-off a division to become an independent company. Spin-offs typically generate value for shareholders through the increased value of the shares they receive in the new company.
The parent company creates a new subsidiary. Shareholders may decide to take shares in the new company or keep their shares in the parent company. Investors must sell their shares to realize gains immediately, as no cash is involved.
The parent company sells part of itself through an IPO to form a new company. Parent companies usually remain the major stakeholder and retain control. Equity carve-outs can raise cash quickly and increase share value.
Regardless of which type of divestiture you engage in, knowing the three stages of successful divestiture will give you the big picture to guide your team.
Key Considerations for Divestitures
Even though dozens of players and considerations are involved, speed is crucial in performing divestitures. McKinsey research shows that divestments completed within 12 months delivered higher excess total returns to shareholders than deals that took longer.
When your divestment team breaks its divestiture strategy down into three primary activities, you can focus limited team resources on each phase at the right time. You avoid leaving money on the table, losing sales, and disentangling difficulties.
Clearly Define What You’re Selling
The first activity is portfolio evaluation to choose the right assets to dispose of and clearly define them. In most divestments, this phase consumes an excessive amount of time as executives avoid divesting until it’s clear the unit must go. Careful evaluation, clear asset definition, and quicker action can enable sales at higher values.
When defining the asset, pay close attention to the financials to get ahead of prospective buyers performing their due diligence. If the buyer’s team discovers an issue you missed, it could be embarrassing and drive asset value down in negotiations.
Considering possible disentanglement issues before beginning marketing efforts will help maximize value estimates, determine the best value story, and make sales information more credible for potential buyers.
Market the Asset Using Upside Valuation
The deal team must look at the asset being sold with fresh eyes from the buyer’s viewpoint and compile a thorough assessment of the upside opportunities potential purchasers can exploit. This will enable your team to push buyers toward the best possible price.
Highlight the full range of value-creation opportunities like growth and cost improvements accessible to all buyers. For individual buyers, demonstrate how they can expand profitability through integration with other assets they own, a change in market positioning, improved technology, or the profound experience of the asset’s management team.
When potential buyers understand how they will enjoy new revenue streams, they may become willing to pay more. Showing them a plan for disentangling the asset helps them see exactly how they can realize those streams.
Create a Roadmap for Disentangling
A comprehensive separation roadmap can remove internal objections, assuage buyer doubts, and give your divestiture team a clear path toward optimum disentanglement.
Include all activities and workflow sequences with clear goals and milestones. Incorporating timelines will enable your team to use stage gates. Then the team can evaluate the deal’s progress at critical junctures to discontinue or renegotiate if thresholds are not met.
Using these three steps for successful divestitures will make realizing the benefits of a divestment more readily attainable.
Realizing the Many Benefits of a Proactive Divestiture Strategy
The stigma of failure associated with divesting is fading as more corporate executives and shareholder activists see how divestiture has benefited other companies. Increasing numbers of wise executives understand that shedding underperforming assets can be a growth path.
The primary, overall benefit of divesting is the increase in value divestment can bring through an improvement in firm performance and share value. There are numerous specific benefits of divesting, including:
- Increased cash reserves that can be used to invest in more profitable business units
- Reduced debt that eases the burden of paying interest
- Streamlined operations that allow personnel to focus on core business activities
Incorporating an active divestiture strategy into your M&A planning can help your corporation shed assets unaligned with your company vision while giving you cash to make that vision a reality more quickly.
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