Divestitures are sales of a segment of a company’s business, such as a business unit, a product line, or even an individual product. Divestitures historically have accounted for a sizable percentage of all M&A transactions executed (estimated to be about 25% in recent years). Decisions to divest or dispose of a segment of a business generally originate once it becomes evident that the unit in question is no longer compatible with the strategic direction of the parent company. Divestitures are generally proactive initiatives that lend themselves to detailed planning and execution. Management of these transactions can be broken down into three distinct phases:
Divestiture planning begins with the development of a paper that lays out the rationale for disposal. That document becomes the basis for corporate approval (from the CEO or the board), which is the trigger event for launching the initiative. Approval will be followed by the development of a retention plan (with incentives) for key personnel associated with the property being divested, to minimize business disruption and loss of productivity. At about the same time, a team charged with responsibility for the transaction should be assembled. The first priority of that team should be to develop a detailed divestiture plan that would identify objectives, assign responsibilities, outline the sales process, and establish a timeline for implementation. The final element of the planning process should be the creation of a communication plan for announcing the prospective sale and its rationale to the employee populations (those of the parent company and those of the business being divested) and external constituencies, such as customers, suppliers, contractors, and, if appropriate, shareholders and the investment community.
The vast majority of divestitures are made by large businesses, frequently publicly traded companies. These companies usually opt to use a business broker or investment banker to assist in the sale. In these situations, the first step in this phase of the process will be to engage the broker or banker. If the business unit to be sold is of substantial size and is integrated into the infrastructure of the parent company, the seller might also engage an accounting firm to “carve out” dedicated financial statements that fairly represent the historical performance of the unit being sold.
With assistance of the broker or banker, and under the direction of the divestiture team, the key managers of the business being divested would develop an offering memorandum or prospectus that would eventually be sent to possible buyers. In a similar manner, management presentations would be developed to be used by the management team to describe the business to a limited number of qualified, potential buyers after the field is pared down. Concurrently, business, legal, and financial documents of interest to a buyer would be assembled in a data room, a location where the information would be stored and indexed awaiting buyer review. During this phase, a list of potential buyers would be created by the broker or banker and vetted by the divestiture team. Once all of these tasks have been completed, the process would be ready to move to the execution stage.
The execution phase of the process begins with the announcement of the prospective sale. This announcement is essentially the implementation of the communication plan. Shortly thereafter, the seller would solicit initial bids from the list of potential buyers. Generally, a limited number of qualified buyers would be invited to participate in due diligence, and, ultimately, the field would be narrowed down to the final buyer. The parties would then proceed to contract and close.
Importance Of Proper Planning And Disciplined Implementation
The transactions just outlined are generally of a material nature and entail significant risk for the participants. Although proper planning and disciplined execution cannot eliminate the risk inherent in such transactions, attention to preparation and execution can serve to substantially mitigate that risk. Although there is tremendous variability among and within the types of transactions described, several principles worth noting should be adhered to by those who manage M&A activities. They are:
- Leave as little as possible to chance. Establish clear objectives and develop detailed plans to attain them.
- Ensure that transactions are properly resourced. Draw on internal and external capabilities as needed and consider them investments, not expenses.
- Respect the importance of staging and event sequencing within a transaction. Transactions may differ in many respects, but they all follow a logical and natural process. Remember the adage, “Nine women can’t make a baby in a month.”
- Do not be afraid to walk away from a transaction. Do not give in to the temptation to salvage a transaction that does not make strategic or financial sense. At any point in time, the costs—both financial and psychological—should be considered sunk costs.
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