With pressure to increase shareholder value from low productivity assets, many companies are exploring the idea of divestures. Yet, a recent article by McKinsey & Company suggests that only 29 percent of divestitures achieve win-win scenarios, whereby both the parent company and divested business achieve excess total returns to shareholders (TRS) following the separation. What stands out about these companies? Speed appears to be the source of their success.
According to a study of major divestitures between 1992 and 2017 by McKinsey, separations completed within 12 months of announcement achieved higher excess TRS than those that took longer. A speedy separation, however, requires careful thought and planning in advance of a public announcement. In particular, the article suggests that successful divestors typically incorporate four tactical moves to maximize speed.
1. Establish a dedicated team that efficiently manages deals to completion
The skills required to execute a divestiture with speed and precision differ enough from those used in M&A that even sophisticated acquirers may slow down a divestiture. McKinsey suggests that establishing a dedicated divestiture team in charge of managing the separation from beginning to end helps ensure an efficient transaction process. Candidates for this team should have a general-management background, a keen view of investor expectations, and a clear understanding of the true sources of value for the parent and divested companies.
2. Share incentives for managers in both the parent and divested companies
A common mistake made by leaders in a parent company is adopting an “out of sight, out of mind” mentality with the company it is seeking to divest. The divested company needs to reflect the parent company’s objectives in order for a sale to take place smoothly, and managers in divested businesses can easily shift their priorities towards the future of the separated business if pushed to the sidelines. By aligning incentives of the departing business’s managers to the characteristics of the sale, a parent company can ensure that each stage of the separation will be managed with care.
3. Implement a test-and-learn approach that avoids delays from restructuring
While financial and legal issues are central to successful divestitures, the managerial and operational complexities cannot be overlooked. In order to avoid errors or delays down the line, divestors should think carefully about how to “rewire” business functions and set up new governance structures. Before a public announcement, McKinsey suggests putting critical processes in a divested business through pressure tests, in both optimal and less-than-optimal conditions, to determine the best approach and minimize operational delays in the departing business unit.
4. Limit use of transition-services agreements
Many companies rely on transition-services agreements (TSAs), in which the parent company agrees to provide infrastructure support, such as accounting, IT, and HR services, to ensure that operations are not interrupted. Research has found, however, that overusing these agreements allows managers of divested business units to forgo building self-sufficient business functions. Minimizing the use of TSAs, and building time limits into them, prevents these operational delays.
While these tactical elements can assist divestors in efficiently completing their transactions, they speak to a larger suggestion that a good team and careful consideration before an announcement goes public creates a higher chance of success down the road. Divestiture transactions offer a lot to value-minded board of directors, but only so long as employees, customers and investors maintain faith in a company’s strategic plan. Being objective, and utilizing a ‘moved slow to move fast’ strategy can work towards ensuring this value is achieved.
The author would like to thank Abigail Court, articling student, for her assistance in preparing this legal update.
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