Divestment strategies are integral as public companies seek a tactical shift in their business, a change in their margin profile, or a deleveraging of their balance sheet. Whether this means the sale of a subsidiary, or the spin-off (or IPO) of a business unit, these transactions have common characteristics that give rise to a number of important considerations for CFOs and CAOs. Divesting a portion of an organization can maximize shareholder value, but management needs to assess and understand the complexity up front in order to properly plan for a successful transaction.
Understanding how complex a divestiture can be
An early understanding of what group of entities, products, or business units will be included in a proposed transaction helps ensure efficiency in the carve-out process and allows a company to begin operational planning for the eventual separation. At the beginning of the process, roundtable discussions with finance, tax, investor relations, and IT teams can be fruitful in highlighting potential complexities, such as evaluating intercompany or intersegment revenues, how functions filled by shared service centers will be transitioned, and the impact on reporting units for goodwill. However, there are many other considerations when preparing for a divestiture. To succeed in realizing a transaction’s objectives and maximizing value, management needs to understand and plan across multiple dimensions. The matrix below outlines many of the questions management must answer to succeed, including deciding on the transaction type, defining the impacts on processes and systems, and understanding the requirements for risk and change management.
Below, we dig deeper into three of these key questions.
What SEC and regulatory filings will be required?
For a public company, in addition to considering operational readiness, the finance function of the parent entity will also need to prepare to disclose divested businesses as discontinued operations in their annual and quarterly filings and any potential 8-K filings with the SEC. This preparation takes time and focus. Failing to provide the right level of support could lead to inefficiencies, missed filings, and potential delays with capital transactions. Additionally, certain divestiture types such as a spin-off requires preparation of a Form 10 with a level of effort often equated to an IPO registration statement.
How will you manage all of the details of the separation?
Transactions typically have relatively short timelines to meet board and investor expectations and to minimize disruption to employees and customers. Management must honestly consider the level of effort involved in preparing to carve-out financial statements and planning operationally for separation while ensuring day-to-day activities remain largely unaffected. Establishing a cross-functional steering committee can play a pivotal role in providing strategic and tactical direction. A dedicated program management function is essential for monitoring progress, communicating decisions, and reporting to the board of directors. Management needs to assess if internal resources can disengage from their “day jobs” and focus on executing the transaction, or whether outside support is needed to temporarily supplement and enhance the team.
How will you ensure consistent communication throughout the separation within the project team, and with your employees?
The program managers need to establish regular forums for communications, such as steering committee meetings, dashboards, and regular status reporting in order to provide stakeholders opportunities to raise concerns and to collaboratively resolve risks and issues. In addition, when preparing for a separation, the program management function should involve other stakeholders - such as HR, IT, marketing, investor relations, and treasury - and focus on clear and consistent messaging. It may be necessary for project managers to work with these stakeholders to build out collateral, such as post-separation corporate budgets, organizational charts, hiring plans, training programs, contracts inventories, employee and customer communications plans, and bank account inventories early in the process in order to properly plan for disentanglement. Effective communication throughout the transaction is crucial and requires detailed planning and execution diligence.
A well-executed divestiture will provide a great opportunity for a business to grow strategically. To achieve these benefits, management needs to begin by assessing how ready the organization is to implement the many complex steps in the transaction. Failing to do so will cause disruption, delay, additional cost, as well as employee, board, and customer frustration. However, an effective and honest assessment utilizing the matrix above will help to position the company to successfully achieve its objectives.