WHILE THE APPETITE for divestments may be growing, the conditions for completing transactions remain challenging: boards, regulators and shareholders want assurance that the strategic and value creation objectives from divestments will be achieved; buyers, meanwhile, are scrutinising potential deals more carefully than ever.
Empirical evidence from Ernst & Young‘s global corporate divestment study shows that companies which take the appropriate steps are achieving greater value and making speedier disposals. The report identifies key leading practices that companies should employ in order to avoid leaving money on the table, and to help achieve a successful divestment.
Regular portfolio management
It is essential that businesses conduct structured and regular portfolio management. With regular reviews of their portfolios, companies can use divestments as a strategic tool, rather than considering divestment as a reactive move to free up cash or pay down debt. Leading companies regularly assess whether their assets are contributing to strategic goals or if capital could be used for other purposes. High performers often have a structured and regular portfolio review process in place.
In contrast, less organisations have adopted a structured approach to business portfolio analysis and even fewer have a structured approach that is carried out on an infrequent or ad hoc basis. Finance directors can and should play a key role in ensuring regular and structured portfolio reviews are carried out and can co-lead on the reviews with their CFOs and make strategic recommendations to the board.
Developing consistent criteria for divestment decisions is crucial. Currently the key factor determining if a business stays within a company’s portfolio, for almost six out of ten respondents, is whether the asset dilutes or enhances earnings per share, and how it performs against financial benchmarks such as return on capital employed. Alignment with overall strategy lags behind these two factors, suggesting many divestments are still reactive rather than strategically driven.
FDs can work closely with corporate development officers to help develop a set of standardised performance measures to assess the company’s portfolio and benchmark performance internally (against other business units in the company) and externally (against competitors), and also assess the strategic fit of assets with the rest of the business.
Full range of buyers
It may sound obvious, but sellers need to remain open-minded and consider the full range of potential buyers. Companies that think strategically about divestments set clear goals for the sale at the outset. They take a view on the value they expect to achieve and the speed with which the transaction can complete. They understand where interest in the asset is likely to lie, but take a broad view of potential acquirers. Chief operating officers can play a role in facilitating both the setting of these objectives and their execution.
FDs understand their companies’ assets very well, working closely with the operating units every day. Their contribution is to provide the information and data necessary to their business development colleagues to tailor the sale process to specific buyers or groups of buyers.
A tailored approach
When approaching potential buyers, companies need to make sure they are articulating a compelling value and growth story for each individual buyer. Buyers are becoming more circumspect than ever about the growth potential of businesses being offered for sale. However few sellers articulate a strong growth story from the perspective of the most likely buyers. Asked how they enhance the value story of a their divestment, less than 50% of companies surveyed by E&Y said they carry out activities such as supporting the market or product growth story with independent review, developing a M&A plan for potential investors, providing their own view of synergy opportunities to buyers or developing a range of potential upsides.
FDs can improve these percentages by providing information about an asset’s historical performance, locating sources for independent review and articulating a view of synergy and implementation opportunities for the acquirer.
The FD should also consider making him or herself, and the management team of the asset being divested, available to answer questions from potential purchasers – without losing track of day-to-day operational responsibilities. By doing so, the buyer’s confidence will increase to a great extent.
Prepared for all outcomes
Rigorous preparation is always needed. An uncertain economic environment increases the risk that a transaction will not be completed. By preparing effectively, companies can instil greater buyer confidence, gain more control over the process, move more quickly and realise greater value.
Many companies admit there is room for improvement. When respondents were asked how they would rate their preparation effectiveness for the most recent divestment, just 54 % said they performed well in any one aspect of the process. Only 42 % believe to be effective in involving key business functions in the preparation process.
If those figures are to improve, companies need to ensure that preparation is a regular and ongoing activity, not something that only begins weeks before the company decides to sell an asset.
Fundamental to being prepared is prioritising performance improvements initiatives. Deal success on value is closely linked to the seller being able to validate and support the upsides from performance improvement initiatives and demonstrate that these are not just short term savings. FDs play a key role in ensuring performance improvement plans are running well in advance of a sale process and are well prepared to share data on the initiatives like costs to achieve and savings to date vs. the targets.
Being able to articulate a clear separation plan to buyers is critical to value protection as when sellers don’t clearly communicate the separation challenges and plan, buyers are likely to perceive greater risk and they reflect that perception in their offering price.
FDs should work closely with the Business Development lead, in thoroughly assessing the separation challenges, estimating the standalone recurring and one time costs of separation and are typically heavily involved in TSA negotiations. Additionally all these factors should be considered in the separation planning.
Michel Driessen, partner and leader of operational transaction services at Ernst & Young