Companies spent trillions on software and Internet mergers and acquisitions in the post-bubble boom. Some of those acquisitions have fueled growth, geographical expansion and innovation. However, many have fallen short of expectations, taken companies outside of their core focus, or drained resources from more promising lines of business. These assets should be sold, but this is easier said than done.
Carve-outs are tricky. Valuations often rely on pro forma rather than actual results. Planting a for sale sign on a line of business can invite a media and analyst frenzy over the health of the parent company and the possibility of a fire sale. Key employees may go to work on their resumes, or lobby to stay with the parent. Many carve-outs involve assets that were purchased during good times for what in hindsight was an inflated price. A divestiture at a lower price today could be interpreted as a tacit admission of failure, or evidence of overreaching.
Executed poorly, a divestiture can be a disaster. Executed well, it can create value.
The market downturn offers a unique opportunity to divest non-core assets. In a down market, analysts are numb to negative news because that is all they hear. Revenues and profits are down already, so why not restructure customer relationships from perpetual to recurring licenses? The result will be an even bigger hit on near-term revenues, but a huge uptick in the net present value of customer contracts. Downsizing is expected, presenting the perfect opportunity to lay off marginal staff. And, most importantly for this discussion, the analysts want to see focus and discipline. What better way to satisfy these criteria than by shedding non-core businesses?
The market has created certain challenges. A business unit will generate less in a trade sale today than it would have a year ago, and it will take longer to close a deal. A low valuation is especially troublesome to a corporate development group that paid a much higher price when they originally bought the asset. However, they probably care more about this issue than anyone else. A review of press coverage on recent divestitures reveals an interesting fact: whether or not financial details were disclosed, there was very little speculation on whether the price was good, or even fair. A well run process will ensure that the sale is at fair market value and reflects what the market will bear.
For example, press coverage on Motorolas sale of the Good Technology division mentions the end of the companys foray into push services (PC World). The Wall Street Journal pointed out that the sale netted far less than the $500 million that Motorola originally paid for the division, but went on to discuss the benefits of the deal, including an end to litigation between Motorola and Visto.
Every business opportunity in the global economy is being reassessed. Listed companies go through this process in the spotlight of the public markets where equity value has dropped in value on average by more than 50% since the start of the recession. Divisions within these companies have likewise diminished in intrinsic value. More importantly, they may be distracting the more critical business units from their focus, and holding the consolidated company back from its potential.
Divestitures can help create shareholder value, and although valuations are down, the market is very receptive to these transactions. How, then, to execute? The following 10 points are culled from over ten years of transaction experience:
1) Think backwards from a press release that explains why the divestiture makes strategic sense. Formulate a clear and compelling strategy and articulate that strategy in every communication.
2) Restructure the business before you sell it. Don't expect the buyer to pay for employees that aren't necessary for running it.
3) Contain the process to the division being sold. Don't let the bankers or the media paint the entire company with the same brush. This takes care of itself if your strategy is clear and focused.
4) Run a process. Don't get sucked into serial negotiations with potential buyers. Talk to everyone in parallel.
5) Reach out to international buyers and private equity funds, as well as their portfolio companies.
6) Be realistic on timing. It will take 6 to 18 months to get the deal done under current market conditions. There are exceptions, but strategy should not be created around the exceptions.
7) Pay attention to the customers during the process. Reassure them that you are seeking a better owner for the division. Customers can be amazingly loyal during the process, but only if you communicate well with them.
8) Put someone in charge of the deal. Someone who a) has bandwidth to manage the transaction, b) knows how to manage it. This can be your M&A advisor or a corporate development professional. A C-level executive with other responsibilities is probably the wrong choice. And avoid enrolling board members and others into a broad selling campaign, because that will only confuse the market.
10) Close quickly. When the economy is booming, companies become inefficient. They staff for growth. They build redundancies into every aspect of their operations. They take risks, and they make a lot of acquisitions. A healthy economy provides ample revenue to fund inefficiencies and failed acquisitions.
In a downturn, everything changes. Cash flow is tight, and mistakes can be fatal. This is your chance to streamline operations, sell non-core assets, and ride out the storm. This is the hard part of the cycle, but it is also the part where you do the best work for your shareholders. This is the time when you position for real growth, and real value creation.