Divestitures: Is Breaking Up Hard to Do?
4 August 2017
We recently hosted a panel discussion comprised of three Corporate Development professionals and one Private Equity professional from the Bay area for a conversation around the topic of Divestitures.
The context for the panel topic was a recent report on a study of Excellent Corporate Portfolio Managers (ECPMs) – top global M&A performers – that Intralinks conducted with the Cass Business School, London. The research study suggests that firms can achieve superior total shareholder returns with an M&A management program that includes several acquisitions per year on average, while simultaneously conducting a limited number of divestments (one to two divestments every three years) once they have been publicly listed for at least three years. This was the backdrop to the panel event; and by the end of the discussion it was clear that “breaking up is indeed hard to do.”
Joining me on the panel were:
Seshu Ajjarapu – Principal, Mergers & Acquisitions at Google
Ian MacLeod – Operating Partner at Welsh, Carson, Anderson & Stowe
Kevin Jacques – VP of Corporate Development at Intuit
Bradley Thomas – VP of Corporate Development at Juniper Networks
While there’s no blueprint for guaranteed success, I was able to extract some valuable insights and recommendations from the panel. Three recurring themes continued to surface and are important to take into consideration:
Have a solid communication strategy. For the employees working at the business unit or asset in question, the obvious risk of sharing too much is in distracting them. You have to determine whether the distraction is worth it, especially if you’re unsure of whether or not you can sell the asset. “If I had the chance to do it again, I wouldn’t keep everyone in the dark,” said one of the panelists in response to a recent divestiture. Another indicated that his organization pre-announces, and that doing so removes uncertainty during the search for the ideal buyers; in some situations, pre-announcement brings more bidders to the table. This strategy simplifies some of the complexities around the people side of a divestiture; but there can be some challenges with this course of action as well, and a solid messaging plan is a must. With pre-announcement you have to be prepared for FUD from competitors. Ultimately it’s important to find the right balance and ensure that keeping information too close to the vest doesn’t hinder your ability to effectively divest.
Employ people who are good at managing data rooms. This is not a shameless plug; it was an actual comment. I think it speaks to the need for organization. Uncertainty and lack of momentum drive a discount. Having the right systems and processes in place will help to ensure that you have accurate documentation, that you can manage the inevitable questions that will be asked, and that the valuation is appropriate.
Invest a suitable amount of time and money to divest properly. It’s important to set realistic expectations with all stakeholders, especially for those who have not been through the process. Sometimes investing a bit more up front – in things like audited financials for the entity being carved out – will save you from having to resort to less desirable methods of financing in order to get the deal done. Divestments are not something you want to rush through. On average a divestiture will take between 12 and 19 months, not including the transitional service agreement (TSA) period. An asset that is fully integrated is going to be more complex than divesting a stand-alone business unit. All the rules are different across every geography and the people aspect becomes a lot more complex when dealing with a cross-border transaction. When divesting a SaaS asset, you will have to coexist for a reasonable amount of time to effectively disentangle software, IP, etc. A timeframe of 9-12 months seems like eternity to a management team who doesn’t have experience divesting. Again, uncertainty drives a discount, so you want all parties involved to be confident and certain of the outcome.
Reasons to divest vary by company and by situation, but often the asset in question has moved away from the core business strategy, is underperforming, or has reached a point where company resources would be best invested elsewhere. Surprisingly, valuation was low on the priority list when compared to other reasons like ease of process, certainty of outcome and ensuring that the asset is a good fit for both the employees and the customers being served.
An activist investor can sometimes be the catalyst that forces a discussion about divesting, but this is not the deciding factor. There are often many contributing factors. A shift in leadership or strategy will contribute to the ultimate decision. All of the panelists emphasized that they try to put people first – whether it’s finding a place where the divested team can still achieve its mission or finding them a new role within the organization that remains.
In addition to important data around divestiture actively, our partnership with Cass Business School, London has yielded thought-provoking and actionable insights across the M&A deal lifecycle. Click here to learn more.
As Intralinks’ senior director of strategy and product marketing, Matt Wells is a key member focused on the development and go-to-market strategy for Intralinks’ M&A business which includes our virtual data room and deal lifecycle solutions. Matt joined Intralinks in 2012 upon the acquisition of PE-Nexus, a company he co-founded in 2010 that pioneered the concept of online deal sourcing and buyer identification. Before PE-Nexus, he was a vice president at Cross Keys Capital, a boutique advisory firm, where he focused on middle-market M&A transactions.