In order to achieve growth organizations give more importance to Merger & Acquisition. Merger & Acquisition plays pivotal role in organizations Corporate Strategy & maintaining portfolio of business to achieve high return on capital & growth. However situation arises once organization diversify itself into various businesses and its corporate portfolio becomes so huge that it is very difficult to maximize return on capital & take advantage of new growth opportunities.
Divestitures and carve-out plays a very important role in restructuring organizations corporate portfolio to maximize return & growth.
Normally organization doesn’t give as much importance to divestitures as to M & A however if Divestiture/Carve-out activity carried out timely & sequencely then it can provide huge benefit in terms of shareholders value, future growth and cash flow.
Why organizations do Divestiture
The reasons to divest a business are wide-ranging, from short-term cash generation to a desire to restructure the business portfolio by spinning off non-core or low-performing assets. And regardless of the driving force behind a divestiture, the overall objective of most companies is to get the best possible return—i.e., the highest price.
In order to get optimum return from divestiture organizations should do it in an accelerated time frame. Best practice is to make sure that to-be-divested units are configured for maximum appeal to potential buyer, and putting effective program management in place to manage the complexity of divestiture.
Divestiture Strategy
In order to develop its divestiture strategy, a company should comprehensively assess its corporate portfolio to identify opportunities for value creation. This entails four basic steps:
- Aligning assets with the business’ best opportunities
- Developing a timing and sequencing strategy for separation & divestiture transaction
- Define boundaries of assets being considered for divestiture
- Packaging the divestiture assets for maximum value
Aligning assets with the business’ best opportunities
Organization should carefully study the overall business’ growth opportunities, and the capital required for each business in the portfolio to take advantage of those opportunities. This perspective then must be paired with an understanding of the potential value of each business to an external owner compared to its worth to the divesting company.
Timing & Sequencing Strategy
Parent company should determine the most advantageous timing & sequencing strategy for the divestiture and its execution. In most instances, it is best to start with carving-out of a business unit before the sale process. Following are the benefits of carve-out.
Transparency
Potential buyers require full transparency of an asset’s tangible and intangible value, contracts, service relationships and, of course, revenues and costs. Transparency will be easier to achieve if the divestiture target is a separate legal or organizational entity (which includes having its own accounting systems and boundaries).
Avoid Uncovering Bad News
The second reason to begin the carve-out process early is that having a concrete and defined divestiture target helps to avoid uncovering any bad news during the sale process that would be an obstacle to negotiations with potential buyers. Furthermore, having already executed the carving out of the asset to be sold enables the selling company to quickly capitalize on emerging sales opportunities—such as a sudden recovery of M&A markets or the appearance of an unexpected potential buyer.
Define Boundaries of Divestiture Target
Once the timing and sequencing of the divestiture are determined, a company must carefully define the boundaries of the divestiture target, taking into consideration the strategic fit of the business unit as a whole and its constituent parts within the parent company. For example, one business function of a to-be-divested business unit might provide research services to the rest of the parent company, or possess valuable technical knowledge.
In addition, the future intended scope of the parent business after the divestiture should be considered to ensure potentially valuable assets are not jettisoned.
Packaging the divestiture assets for maximum value
The final step is to make the divestment target as attractive as possible to the most likely acquirers. Stopping at the prior step and focusing strictly on the to-be-divested business unit’s boundaries from an internal viewpoint likely would not result in the most attractive asset from a buyer’s perspective. For example, some investors desire complete, operationally functioning entities.
To facilitate a transaction the divesting company would need to provide a unit meeting that description from the buyer’s perspective and further adjust the boundaries of the to-be-divested organization if needed.
Divestiture Strategy Execution
Once it is clear which assets to divest and how it should be packaged, a number of best practices can help ensure successful execution.
Effective program management should be put in place to avoid underestimating the impact of divestiture on daily business.
Second, a company must plan for the future success of the divestiture target, and make sure accountability between the parent company and the to-be-divested organization is clearly defined.
Finally, it is vital for a divesting company to maintain an open dialogue and stay flexible as the transaction unfolds.
British Petroleum’s master carve-out & divestiture strategy
BP captured $9 billion in cash by divesting its petrochemicals units—up to $2 billion more than Wall Street analysts had expected. In crafting the divestiture program, BP’s corporate development experts defined the major steps needed to separate and sell the $25 billion-a year petrochemicals business. First, the unit was carved out as a standalone business under its own name—Innovene—so it could float on the New York Stock Exchange.
The carve-out, making Innovene the world’s fifth largest petrochemical and polymer company. BP’s dedicated corporate development team determined the key phases, major milestones, work streams and project teams needed to deliver the complex divestment. The whole process involved a detailed assessment of the path to a rapid separation, accelerating the process by two months and greatly enhancing BP’s chances of obtaining the best possible valuation in an IPO. As soon as Innovene was legally a separate entity, the priority turned to IPO preparation, developing the necessary sales presentations for the underwriters and preparing the flotation prospectus. Then the BP team made its move to woo potential buyers, which meant getting ready for the prospective acquirers’ due diligence procedures—a major work stream in it. The multiple options strategy paid off brilliantly, sparking a successful bid from specialty chemicals producer INEOS. The $9 billion deal represented one of the largest-ever leveraged buyouts and instantly made INEOS one of the world’s largest chemical companies. BP had completed a huge divestiture only a year after declaring its intent to sell.
It is generally easier to pursue divestiture in robust economy than during a downturn. Companies should use divestitures to enable much more substantial and long-lasting change. Success in the current economic environment can hinge on effective portfolio rebalancing and efficient divestiture execution. Companies that configure business units for maximum value, manage the complexity, ensure accountability and embrace flexibility throughout the divestiture process improve their likelihood of success. For many companies, there is no better time than the present to pursue divestitures to position themselves for high performance when economic conditions ultimately improve.
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