End Divestment

In the first article we discussed how and why businesses may have accumulated subsidiary operations that are now non-core and some of the factors that can lead to a need to divest these. In this one we look at what objectives you may want to secure in achieving a divestment and how these impact on how you will go about a divestment of a non-core operation as well as factors which can block a disposal.

What Do You Want Out Of A Disposal?

The key outcomes you are looking to achieve from the disposal process will obviously be highly influenced by main reasons for disposal.

In some cases the driver will simply be cash, and the more of it, the faster, the better. But in many situations cash may not actually be the sole, or even a key, consideration and other factors may rank higher such as:

• Freeing up management time – to focus on the core areas that are important to the future of the business, in which case speed and certainty of completion may be key criteria. In these cases you will be looking to find parties in whom you can have confidence to act quickly and to see a transaction through to completion.

• Maintaining public relations and market image – so as not to damage the retained business’s standing, or its customer relationships. After all, the core operation may want maintain ongoing business dealings in respect of its other services. In these cases you will be searching for parties who can be relied upon to both act with discretion, as well as being a safe pair of hands into which to pass the divested operation so as to provide ongoing services to the customer.

• Maintaining employee relations – is a similar issue to that of customers as the business may want to demonstrate that despite the disposal it is concerned to ensure its employees are looked after appropriately. In these cases you will be looking to see that the other party is intending to take the business forwards with the existing employees.

By way of an example, a US multinational decided that it wanted to focus on its core products which in part involved supplying into the automotive sector with the restructuring to be completed by the year end. However as a legacy of a past acquisition it had a small and poorly performing UK based manufacturing unit, operating in a completely different field in which the parent group had no expertise; but which was supplying key components into its main automotive customers.

The parent therefore needed to speedily exit the business, but in a way that meant that its employees were taken care of, its customers supported (and ideally the performance issues addressed).

A deal was therefore done to dispose of the business to an acquisitive business focused on manufacturing operations. They completed within two weeks over the period leading up to Christmas and then used their manufacturing expertise to fix the quality issues that were plaguing the operation.

How Can You Go About Disposing Of A Non-core Operation?

There are a number of ways that a business can arrange to divest. It can choose to shut, spin off, or sell the relevant operation, and the approach taken tends to depend on the objective sought, the relative size of the transaction in comparison to the parent company and the urgency of the situation.

• Shutting – is usually the least favoured option for a number of reasons. In PR terms it tends to be seen as an admission of failure, in financial terms it tends to incur significant costs such as for redundancy payments, and in operational terms this process really does absorb management time. It will therefore occur in cases where either the other options are not feasible, or where part of the motivation for closure is to take excess productive capacity out of a marketplace.

• Spinning off – where part of the business is allowed to operate as an independent business entity can be used to free up management time back at the core business. It can also be used as a stepping stone towards a complete sale of the parent’s interest in the now independent entity.

• Selling – involves disposing of the relevant operation to another organization through anything from a full corporate finance disposal exercise to the type of swift deal involved in the example above.

What Factors Can Work Against Making A Divestment?

Many potential divestments don’t in fact get this far as a result of management’s perception of the operation. They may for example see current poor performance as a temporary problem as they expect underlying demand to pick up and therefore will look to support a business in difficulties with time and or funding to give it a chance to recover.

Even when management come to accept that a business is failing, there can also be reluctance to divest as this is often felt by management to be a public admission of the fact which can be difficult to face up to for reasons of pride. Again, management may wish to continue to support the business, although the arguments advanced for doing so will centre around the need to preserve confidence in the underlying business and manage its reputation, and not the need to protect managements’ egos.

As with many things in life, it is not enough to take the decision to divest a non core business, you also have to make it happen and implementing the disposal may not be easy.

To get a sale away you first need to find a buyer. If the operation involved is a failing one this can be difficult although there are networks of turnaround equity investors who may be interested, as well as smaller acquirers such as the one in the example above.

Then price and terms have to be negotiated with the purchaser. Many transactions fail at this point as the selling management:

• have an unrealistic expectation about price;

• enter into the disposal process for strategic or non cash objectives, but then forget these drivers in the process and attempt to turn it into a cash focused exercise, which can be a real difficulty if the operation in question actually has little or no value; or

• fail to appreciate how the transaction looks from the point of view of the potential purchaser who, for example, may have to take into account a substantial potential TUPE liability in respect of employees acquired with the business.

So, if you have identified non-core operations that should be divested, before going any further make sure you ask yourself, what are the key reasons for this and the important objectives that you will want to achieve in doing so which will drive the choice of method and approach?