Getting M&A divestments right

Divestments are back in the spotlight. After a prolonged period of cost reduction and a focus on cash, companies are reviewing their balance sheets and addressing a backlog of non-core assets, and are pursuing competition authority driven sell-to-buy transactions. In fact, 80% of companies plan to make three, or more, M&A divestments in the next 12 to 18 months.¹

Divestments provide an opportunity for corporates to transform their core business and achieve their growth ambitions. Yet significant divestments tend only to roll around every three to four years - making them tough to master and challenging to pull off. So, what steps can you take to get them right?

Set yourself up for M&A success

The first step is to set aside as much time as you can. This will help you thoroughly plan the divestment and make space for the most challenging exit solution, which is often creating a fully standalone business. Additional time will also provide you with greater flexibility and offer your buyers a timeline that gives confidence. 

Companies that do this well conduct a readiness stage-gate. This focuses on the practicality of the operational separation, including IT considerations, which is often the most complex separation activity you will face. It is key that you minimise disruption, delay and cost, so consider how innovative technology solutions can aid you in this process. Flexible, cloud-based solutions are well-suited to supporting the demands of a divestment process.

A readiness stage-gate should also assess the potential buyers and their needs. When robust, it gives buyers a compelling equity story and leadership team buy-in, with enough time to build credibility and momentum to prove the strategic basis of the target business.

The second step is to build the right execution team and ensure you take a comprehensive and objective view when mobilising this team. The team should have a mix of experience, leadership, internal network and functional insight, to define and create a business and perimeter that works for both buyer and seller. Part of this process will help you to identify any unhelpful emotional biases and personal investment in the status quo that could derail the process.

Get the buyer on board

How do sellers choose the right exit and the right buyer or investor? And how can they meet their needs?

Corporates care for strategic fit and the potential for synergies, and a perimeter that works for them. Private Equity (PE) wants quantified detail, a growth and value creation plan, strong leaders, and a route to standalone operation. A listing requires new structures and new skills for management, a compelling equity story and risk management strategy.

Having a management team who understand the specific requirements of a sale process, is an essential part of building trust and credibility with buyers, as well as running the business during that process.

You can prepare for the probable options, but that doesn’t mean you have to start executing. Embedding their requirements into the plan and execution approach is fundamental to investor or buyer confidence. Adapting to the buyer pool and presenting a value narrative that attracts a wide range of investors or buyers means that sellers can also turn an unsolicited approach into a tight auction that maximises value.

However, building the value story and having the numbers to back it up is not so straightforward. As a non-core asset, it is unlikely to have a strong equity story for you. But what would it be for others? 

The value bridge, a tool to set out the priority strategic levers and the value they might add, brings the value story into focus and cuts through the fog that an exit process may present. This concept will help you understand how a new owner will realise value from the business, and what action must be taken for it to thrive in the future.

Get to the heart of the (little) things that matter to people 

It’s easy to forget that divested businesses rely on motivated and engaged employees to succeed – especially in the long run. In fact, the risks of employee demotivation are magnified by a divestment, so it's important to help your people see that the transition doesn’t need to be the end of familiarity, security, the canteen, or a car parking space! 

New owners will want employees to be engaged with the target company’s strategic future. As a seller, understanding the macro and micro factors that matter to staff – and helping buyers understand them too – will ease the tension of the transaction, so everyone can focus on getting the deal done.

Get M&A deal details right 

Successful sellers also understand that the devil is often in the detail. For a non-core business, where any expertise or corporate memory is bundled inside the divestment perimeter, there is significant risk of leaking value once a deal is set. As the mindset of those due to be divested aligns to the future owners, it may be difficult to ensure decisions remain objective and in the best interests of the parent company.

It’s important not to overlook risks associated with key deal documents. For example, the Sale & Purchase Agreement (SPA) and completion accounts may seem somewhat dry, but savvy buyers will use a carefully crafted SPA to their advantage. Having an eagle-eyed approach is essential as, depending on the counterparty, significant pieces of value can be wiped out if details are overlooked or misunderstood.

Stay focused on RemainCo 

The other side of a divestment is the value delivered to the remaining business via the disposal price and RemainCo’s future strategy. The approach to the divestment should always be rooted in how its value will be achieved.

An obvious risk that’s often poorly dealt with, is stranded costs - costs associated with the divested business that are not included in the perimeter. However, the best sellers will use the divestment to re-focus RemainCo, streamline, and double-down on the core of the business.

Summary

Getting divestments right is ultimately about people and the organisation. Make sure you have the right people in place who can find and protect value, lead the new business, the process, and have the knowledge and experience to get it right.

Remember to understand and manage motivations and people’s incentives before, during and after the deal is struck, for buyers, sellers, and those in the target perimeter. And most importantly, give the business enough time to deliver the right deal. Give it the same, if not more, care as an equivalent acquisition.

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References

¹ 2024 Global Divestiture Survey | Deloitte