Getting it Right Part I: Capturing Divestiture Deal Value
Deciding whether a trade sale, a spin-off or a carve-out is the right exit is fundamental to maximizing the value of a divestiture for the seller and asset.
16 April 2015
Today’s CEOs should take a long, hard look at their portfolio of corporate assets and ask themselves whether particular assets would be more valuable if they left the corporate fold rather than stayed in it. And, having decided that perhaps, when all is said and done, an asset would do better outside the fold, they need to choose the best way to go about divesting it. Because, while it’s an obvious thing to say, deciding whether a trade sale, a spin-off or a carve-out is the right exit is fundamental to maximizing the value of a divestiture, for both the seller and the asset in question.
So, what will it to be?
Investors scrutinize divestitures on multiple levels before deciding whether to cheer or boo. It follows, then, that if companies are to maximize the impact of their divestiture strategy, they need to take the same approach. Boston Consulting Group went back and analyzed years of data to see what lessons can be learned from markets reaction to, and valuation of, different divestiture strategies. They measured the Cumulative Abnormal Return (CAR) over a 7-day window centered on the announcement date of the divestitures studied. The findings were published late last year in“2014 M&A Report: Don’t Miss the Exit.” If you have time, take a moment to check it out.
Investors like all three types of divestitures. Being active in reshaping a corporate’s portfolio is generally seen as a good thing. In terms of popularity, trade sales top the divestiture ranks by a considerable margin. They’re quick and simple to complete and, importantly, tend to be cash-rich. Highly-leveraged companies that use cash proceeds from divestitures to spruce up their balance sheets are usually applauded in the market. It’s no surprise, then, particularly when markets assign higher valuations to assets than their current owners do, trade sales become very attractive.
What is surprising, perhaps, is that spin-offs — cashless, tax-free and more complicated than trade sales to complete — earn more market plaudits than either trade sales or carve-outs. Driven less by a need for cash and more by a need to refocus and exit a line of business, they help reduce the conglomerate discount the markets may have applied to the selling company. Equally, the owners of the freshly spun-off public company are in a good position to reap considerable value twice; from the distribution of shares in the spin-off as well as the increased value of the shares in the parent company, as a renewed focus on the core business improves its own financial performance.
If they get it right, companies may doubly benefit from deciding to carve-out a high-growth, undervalued asset or a non-core business line. The partial IPO generates cash, the market gets to value the asset and the seller gets to keep a piece of the pie as the new carve-out continues on its growth trajectory. But of the three options, carve-outs are the most complex, take the most time and require a certain capital market window of opportunity to make sense.
Stay tuned for tomorrow where I’ll talk about what parent, asset and market attributes to evaluate when you're considering a divestiture.
Allan Cunningham is a senior media executive who has spent the last 15 years of his career working for some of the world’s most respected M&A and Private Equity media companies including Dow Jones’s publications Private Equity Analyst and VentureWire and most recently, The Deal. He has built a number of successful digital and event content businesses, both subscription and sponsor-supported, delivering information and content-marketing services to clients in the M&A and broader deal ecosystem.