A partial sale of an asset or the selling off of non-core operations is more complicated and challenging than most executives realize. Often conducted during a restructuring or turnaround, a business divestiture produces unexpected stress on ownership and management, the time-frame is normally short and the consequences of not correctly executing the divestiture can negatively affect the entire organization. What drives a divestiture is the need to generate cash or management’s decision to spin-off underperforming or non-core businesses. Today also regulatory measures may be another reason to consider a divestiture. Further, a business divestiture is the opposite of investment, and as such is often painful for owners who once invested capital into the divested asset. It has been Summit’s experience that despite all the financial logic of a divestiture the biggest barrier has sometimes been the ego of the owners. Short of closing an operation down a divestiture is often seen as an admission of failure. Divestitures that generate value are few from the divesture itself, but opportunities from the aftermath can provide enormous value creation; in the short term however they do generate cash or they can stop a distressed situation from collapsing within. Of course, they must be executed with surgical precision. As such, we apply our mergers and acquisitions expertise to drive efficient and effective divestiture transactions
Unless financial statements are already broken out showing the proposed divested entity as a stand-alone profit or cost center, sellers must be prepared to support their asking price with very compelling financial data. Normally executing the business divestiture and producing separate financial statements for the divested entity is one of the most complex tasks management can undertake. CSC Capital has been assisting clients divest operations since its first turnaround, and our supporting financial documentation, known within the industry as “crave-outs” has become legendary, because divestiture financial crave-outs actually form the basis of the firm’s financial restructuring. In fact, divestitures has been a major component in the firm’s turnaround strategy. Working in conjunction with CSC Capital Corporate Restructuring, Summit focuses on getting the maximum value of divested assets. Summit advises sellers across their deal phases from planning to transition to optimization. Sellers can therefore be positioned to expedite their deals, maximize their value so sellers can quickly return to re-focusing on other business units in line with corporate strategy.
The divestiture process is the same as with our mergers and acquisitions, though our client is in most cases the seller. The financial crave-out analysis and reformation are both conducted during the Research and Analysis phase. We typically do not engage divestiture buyers as clients, unless they were previously a client or is currently a client in our corporate restructuring program. This is because we cannot, in our opinion, adequately provide professional advice regarding a major asset purchase to a company that we cannot view in a holistic framework. Importantly, untangling a business unit from its parent company is a complex ordeal because the agendas of the parent organization, the spin-off and buyer may all be different. Therefore, it is critical to maintain operational excellence while managing potential conflicts of interest.
Divestitures finally can be a human resources nightmare. The divested business unit’s operational head was probably part of the parent company’s management team, and the loyalties of not only personnel from within the divested business unit but from employees from outside the unit may have strong objections to the sale. And if your client is not fully engaged with the transaction, then the whole process is a psychological mine-field of ups-and-downs. In this sense, a merger or acquisition has more employee relations clarity of purpose, even though its affects are more organizational up-rooting for all. The firm for twenty years has been on the front line in the divestiture process and our professionals have seen the many pit-falls and curve-balls that suddenly appear, if from out of nowhere. At Summit we maintain that a successful divestiture must be a combination of mergers and acquisitions skill and corporate restructuring skill.