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Lifting the veil on divestitures
Until the launch of our new guideline, there had been relatively little information about how management accountants should execute a corporate divestiture to achieve best value. By Alexa Michael, information specialist, CIMA.
Corporate divestitures occur frequently - they accounted for a third of all merger and acquisition (M&A) transactions in the decade to 2007. Yet relatively little has been written about divestitures and company policies governing M&A activities focus largely on acquisitions. Companies also tend to put more resources into acquisitions than divestitures.
To help those who have to manage or participate in divestitures, CIMA has recently published a practical Management Accounting Guideline (MAG) on the subject.
Whether the economic times are good or bad, companies divest non-core assets for either strategic or tactical reasons. The total value of divestitures where a purchase price was stated – about half of all transactions – exceeded US$340 billion across all markets during the decade to 2007. Research by management consultants McKinsey into over 30 recent divestitures revealed that divesting companies benefited from significant cash injections, but also from immediate cost savings of up to 40%.
A corporate divestiture involves the sale of a discrete segment or business unit (a subsidiary, division or product line) of a company. It differs markedly from the sale of a whole enterprise and demands different skills, resources and processes.
The overall purpose of the MAG is to increase readers’ understanding of:
It explains why organisations choose to divest and how divestitures differ from acquisitions. It then provides an overview of corporate divestiture transactions.
While no two divestitures will be the same, each transaction should follow a logical sequence that allows divestiture project managers to choose the best solution in the shortest possible time.
Good practice in executing divestitures depends on a disciplined process orientation. If this process is not followed, or if it runs out of sequence, there is a strong risk that the divestiture process will be prolonged, lose money for the divesting company or even fail altogether. The model below outlines the five stages of the divestiture process. Each stage is summarised here, but is covered in greater depth in the MAG.
In the first phase, the business places the proposed divestiture within the context of its own strategic planning process. Managers will evaluate the business portfolio in relation to the business’ strategic and financial objectives and the condition of the market(s) it serves. In practical terms, managers will identity potential candidates for divestiture, look closely at poorly performing business units and carry out a financial analysis of divestiture candidates.
Next the business case for divestiture is made in the form of an approval document. The purpose of the approval document is to present a case for disposing of the relevant segment in the context of the business strategy. Once final approval has been given for the divestiture, practical steps are implemented to allow the transaction to proceed. These include developing organisational and retention plans, selecting a divestiture team leader, choosing the divestiture team, and producing the divestiture and communication plans.
This stage concentrates on making the business unit being divested ready for sale. It comprises two phases – preparing for the selling process and preparing for separating the business being sold from its parent, known as 'disentanglement'. The former involves engaging external resources and producing selling materials, for example, an offering document or prospectus, and a management presentation, together with the staging of steps to be taken during the selling process. The latter includes arranging the internal resources necessary for the disentanglement, and taking the first steps in disentangling the business being sold from the divesting company.
Execution covers every activity from the announcement of the intent to sell through to the pre-closing agreement on contract terms, plus compliance with any relevant laws and regulations. In practice, divestiture execution involves managing the selling process, soliciting offers from prospective buyers, managing the due diligence process, negotiating legal documents and ensuring that the appropriate laws and regulations are adhered to.
After the divestiture has been implemented and the business is under new ownership, the divesting company should carry out an analysis of the transaction. All relevant information should be recorded for use by those individuals who will be responsible for future divestitures. Retrospective analysis involves identifying the lessons learned – both positive and negative – and documenting the findings for posterity.
Corporate divestitures are lengthy, complicated and demanding transactions. They also present an opportunity for businesses to adjust their strategies and business portfolios so as to increase value for their shareholders. A successful divestiture depends on following a set of processes in a logical and disciplined manner. More specifically, empowered leadership, team cohesiveness and transaction ownership, clearly defined roles, tasks, timelines and deliverables, and frequent and effective communication will each play a significant role.
This article is based on ‘Divestitures’, a Management Accounting Guideline by William Gole with contributions by Paul Hilger, published by CIMA and the Society of Management Accountants of Canada. CIMA members can access the full version at the CPD centre in CPD resources / technical resources.
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