Any uncertainty about the parent company’s future after the divestiture could raise questions among the remaining talent and cause them to consider other opportunities. The board should confirm that management is keeping the entire company in mind and has a comprehensive communications plan for the entire deal cycle. For instance, one US-based global manufacturer determined that pursuing its corporate strategy would mean divesting of businesses in other countries. Over a year, the company developed a strategy for a non-core business as a standalone operation and leveraged its relationships with potential buyers to conduct an international auction.
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Corporate Development And Investment Banking
Businesses that are in the bankruptcy process often need to sell all or part of the business. Chapter 7 bankruptcy is the process of liquidating and closing a business. Other types of business bankruptcy may involve liquidation of some assets. A business might sell some property to solve a cash flow problem. For example, a business that needs money might sell or license some equipment or some intellectual property that it owns.
For example, General Motors filed for bankruptcy in 2009 and closed at least 11 unwanted factories. It divested some of its unprofitable brands, such as Saturn and Hummer, as part of its reorganization plan. If a new company is created through a carve-out IPO, spin-off, split-off or JV, it will need its own board of directors. Finally, the board should consult with management on whether the divestiture process could make the company vulnerable to competitors. With highly visible and/or complex separations, other companies could see an opportunity to disrupt customer relationships and grab market share. Management should explain to the board how the company is prepared to handle any such attacks and how they will provide business as usual for customers. It’s common for employees in these functions to question management’s decision to shift their employment to the new entity, and some could choose to leave for new jobs elsewhere.
Through its disciplined divesting, the forest-products company transformed itself from a traditional pulp-and-paper company into a leader in timber, building materials, and real estate. Divest businesses that don’t fit with your company’s long-term strategy and that would create more value in another firm’s portfolio. Divestiture often follows after a merger or acquisition when redundancies occur or the new owners feel like an asset doesn’t meet the new company’s strategic goals. When divestitures are not carefully planned, they may often be forced by bankruptcies. A corporate spin-off is an operational strategy used by a company to create a new business subsidiary from its parent company. Signaling may impose a cost on a company’s decision to divest due to information asymmetry in the capital markets.
The need to prepare financial statements is primarily driven by the buyer’s due diligence, financing or SEC reporting requirements. In a carve-out IPO, a company separates a business unit or subsidiary but offers only a minority interest in the new entity to outside investors. The result is two separate legal entities, each with its own financial statements, management team and board of directors. But the parent company retains a controlling interest in the new company, which allows the parent to provide strategic support and resources.
A spin-off creates an independent company with its own equity structure, with shares in the new company typically distributed to the parent company’s shareholders. Unlike a carve-out IPO, the parent company doesn’t have a controlling interest and instead holds no equity or possibly a minority stake. This allows the parent company to focus on its strategic long-term goals. A spin-off may not change the overall value held by the parent company’s shareholders, but the newly-independent business may gain new opportunities to access capital or pursue its own deals and growth strategy.
Creating A Separate Company Takes Time
Most people think of the buy-side of these transactions but corporations also actively look to sell non-performing or non-core assets to optimize their business. In 2006 Philips, a Dutch diversified technology company decided to divest its chip subsidiary, NXP Semiconductors. The primary reason for selling NXP was a high volatility and unpredictability of earnings for the chip business, which was hurting Philips’ stock value. Reasons why companies divest part of their business include bankruptcy, restructuring, to raise cash, or reduce debt.
For example, Eastman Kodak, Ford Motor Company, Future Group and many other firms have sold various businesses that were not closely related to their core businesses. For a good example of effective divestiture, look at the $16 billion forest-products company Weyerhaeuser. In the process, Weyerhaeuser has produced some of the highest returns in its sector. Conglomerate Textron’s divestiture team maintains a database of potential buyers in Textron’s markets. Since 2001, Textron has produced average shareholder returns more than 6% higher than its peers’. When analyzing a divestment, analysts in investment banking or corp dev will perform a valuation of the asset using financial modeling and other techniques.
Shareholders choose whether to participate in the split-off by swapping some or all of their parent company stock for subsidiary stock. How shares are distributed distinguishes a split-off from a spin-off.
Depending on the type of divestiture, these costs could affect negotiations between the buyer and seller, as well as the purchase price or cost of the TSA. Companies have multiple options for divesting a business unit and may choose to either maintain some type of connection with the divested unit or sever all ties. Depending on the exit structure and approach, the regulatory, tax and reporting requirements can vary significantly and usually involve different timetables. Focus on the core business—remove non-essential divisions so management and employees can better focus on the company’s overall strategy. This could mean a blunt assessment of how the company is limited or inefficient in some way.
With some divestitures, the board may want to ask management if it’s exploring more than one exit strategy. Dual tracking is when companies consider two or more types of deals at the same time. With divestitures, that could mean planning to spin off a subsidiary while simultaneously marketing it for sale. One transaction may be preferred, but deal documents for a dual track process can be tailored to accommodate both efforts. While dual tracking requires more front-end work, it can provide alternatives for the company and a better idea of the value expected from the divestiture. Often the term is used as a means to grow financially in which a company sells off a business unit in order to focus their resources on a market it judges to be more profitable, or promising. In the United States, divestment of certain parts of a company can occur when required by the Federal Trade Commission before a merger with another firm is approved.
- The best have become what we call “divestiture ready”—able to consistently move at the right time and in the right way to create the most value for their shareholders.
- With time and practice, these companies create an institutional capacity to spot and take advantage of divestiture opportunities whenever they arise.
- At the individual level, divestment occurs when stock holdings are released because of conflict of interest or when an individual investor sells stocks that appear to have a poor future.
- Unless you are forced into a business divestiture because of bankruptcy, you have time to decide what to divest and when.
- Of course, structuring the deal well is only part of a winning divestiture story.
When a company splits-up into one or more independent companies, and consequently, the parent company is dissolved or ceases to exist. Companies divest in order to efficiently manage their asset portfolio. There are multiple options to go about the process and effectively execute the disposition. A spin out is a type of corporate realignment involving the separation of a division to form a new independent corporation.
What Are Some Of The More Common Reasons Divestiture Occurs?
In 2014 the General Assembly voted in favour of divesting from three major U.S. corporations that conducted business in Israel. Bell Canada spun off its regional small-business operations and rural portions of its residential wireline business. It continued providing the new company, Aliant, with some services in perpetuity and others only during the transition.
Divestiture helps manage a company’s investments by drawing back from those that didn’t pay off or have run their course. Sometimes a company’s mission is better served when it’s leaner, but divestment also helps a company settle its debts.
In June 2000, the company spun off its flavors and fragrances interests to the company’s shareholders to form Givaudan. In the fall of 2002, Roche announced that it would sell its vitamin and fine chemicals businesses to DSM for more than €2 billion. The idea was to channel the proceeds into expanding its core pharmaceuticals business in Japan, which it was already in the process of doing by acquiring a controlling interest in Chugai. In making divestiture selections, the best companies are studiously unsentimental, sometimes jettisoning businesses with long and storied histories.
Used consistently, these disciplines produce an internal sell-side capability that enables divestors to generate superior returns for their shareholders. In the following pages, we’ll explore each of these rules in more detail. They’d be worth more in any other company’s portfolio than in yours. Keeping them isn’t essential to positioning your company for long-term growth and profitability. Divestitures have also been used to improve an organization’s public image.
The board also should be confident in management’s plan to keep the remaining businesses running effectively and employees engaged in their work. This investment of time, money and energy usually is significant and can test management, especially if a company is already lean.
Beyond developing a compelling logic for divesting a business as it currently exists, sellers can take simple steps to boost its performance to produce a credible track record of results before a sale. When Pfizer decided to divest its Adams confectionery business, for instance, the company spent several months reducing the plethora of its offerings and renegotiating supply contracts. This effort improved the performance of the unit, making it more attractive to Cadbury Schweppes, which paid $4.2 billion for Adams in 2003. The combination of a good story and real progress paid off handsomely for Pfizer’s shareholders. Though not strictly a divestiture, Gillette’s sale of itself to Procter & Gamble in October 2005 illustrates the payoff that both parties can realize from carefully addressing the first two questions. P&G had been interested in Gillette for years—viewing Gillette’s franchise in razors and blades, and its emerging strength in toiletries, as an ideal extension to its own consumer products portfolio.
Divestiture is an adaptive change and adjustment of a company’s ownership and business portfolio made to confront with internal and external changes. Applying tests like these requires a deep understanding of each business’s long-term profitability and growth prospects—as well as the value outsiders are placing on similar assets.
How Companies Figured Out Which Piece Didnt Fit
Business divestiture is the process of getting rid of business assets, such as property, product lines, subsidiaries, or even an entire business. In all of this analysis, you are looking for products, services, and parts of the company that will bring in the highest amount of money from the lowest-performing assets.