When markets change and crisis knocks, divestments may be a consequence of a corporation’s market or portfolio strategy. A regular review of which businesses to expand, which to penetrate, and which to exit are core to every corporate strategy. But managers don’t handle separations and divestitures every day – their time is usually spent ensuring company growth, dealing with the competition, and addressing market challenges. However, there can be a huge potential upside to a well-executed divestment. So, it can be helpful to take a little time to sharpen your focus and carefully consider your approach. Doing this before it happens will free you of the emotional baggage that often accompanies such things in the heat of the moment, and help identify where your company can realize gains and avoid pitfalls when it comes to separations and divestments.
Carve-outs, separations and divestments will continue to be a catalyst for pandemic recovery in the months to come. Whilst some CEOs may finally decide to divest assets that have been non-core, long before the current crisis ever started, others will have no choice as they must focus on increasing cash-flow to bolster their balance sheets. For some managers, a divestment is simply an exercise to refocus on core competencies, while for others the main objective is to unlock value, raise capital or reduce costs and restructure. Whatever the reason for the sale, in this series, I’ll share practical advice and best-practices for carve-outs and divestments to deliver the desired results.
Divestments Are a Good Thing
I am a strong believer in the importance of positively framing situations and maintaining a positive mindset. Divestments are not necessarily a bad thing. A sale does not mean that we are callously disposing of underperforming business units and their employees – it means that the mother company is no longer the ideal owner of those units. Therefore, selling rather than further developing those assets sub-optimally, is in the best interests of both the parent company as well as the business being sold, and their employees.
Value creation through M&A lies not only in acquisitions but also in sales. New opportunities often arise for businesses under the guidance of a new owner who will bring fresh thinking and capital to the table. Employees whose ideas were not heard before might then find they are listened to – shouldering new responsibilities and tackling exciting new challenges as a result.
Likewise, market changes can either be seen as hurdles and threats to the current business and its operations… or they can be seen as opportunities to shed historic encumbrances and refocus on the things that really matter.
Care-Outs Are Never Easy
Carve-outs are inherently unique projects, and vary just as much as the companies that execute them. Therefore, it is vital for the success of such a project to clarify the scope, in detail, right from the outset. Asking the following questions can help:
- What exactly will be sold, and what will remain?
- Are any assets being transferred over a period of time?
- Will the seller provide any services to the buyer post transaction?
- What is the timeline for the project’s execution, and how flexible is it?
- Is the asset being sold as a stand-alone entity or a partially integrated business?
Even the answers to the basic questions above (let alone the many more and far more detailed questions that are yet to be asked) can already dramatically change the approach to planning and executing a divestment. The last question, for example, seeks to clarify whether a new entity with separate processes and systems has to be created.
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