Divestiture: issues in separation and integration in unprecedented times
When a business takes the decision to divest a part of itself, there are a number of complicating factors that stand in the way of success, for both the seller and the acquirer. These have only been exacerbated recently by the long tail of COVID, by the war in Ukraine, by supply chain issues, by the tightening labour market, and by rapid inflation. However, the money is still there for good deals, both in the full coffers of PE houses, and from debt funders looking to deploy cash.
Separation and integration projects have differing objectives for sellers and buyers, but both need now more than ever to deliver for their respective stakeholders. The money in the market needs to be invested, and is available for the right transaction.
A seller’s objectives include:
- Maximising the financial return
- Structuring and delivering an optimal form for the business sold
- Minimising disposal costs
- Accelerating the transition to standalone for the business sold and removing stranded costs
A buyer’s objectives include:
- Confirming through DD that value in the acquisition is sustainable in the coming economic climate
- Understanding and managing the separation and/or integration risks
- Certainty over separation or integration costs
- Assurance over synergies post acquisition, their timings, and the costs to achieve these benefits
Both the seller and the buyer are looking for a smooth transfer on Day 1, a quick transition to the post sale form for the business, and minimal one-off costs and risk.
Different buyers may have differing objectives. A financial buyer (e.g. PE) may have a shorter investment timeframe, meaning that a 12-18 month separation process may be an issue. They may lack an existing standalone infrastructure to service the separated business, and they may struggle with resource availability to manage a carve-out process.
A trade buyer is typically in a better position. They will usually have a longer investment timeframe, and infrastructure gaps may be replaced with the acquirer’s own, leading to a shorter transition anyway. The carve-out transition could be executed by the acquirer’s management team, and there may be easier opportunities for synergies.
Attracting both sets of buyers to create competitive tension requires careful pre-deal separation planning, particularly now with the focus on quality deals that will perform under difficult conditions.
In planning a separation, there needs to be focus on retaining key customer/supplier relationships and key employees, the employee transfer consultation and any change to the newly standalone business’s culture, establishing standalone processes/controls, identifying skill gaps and requirements to replace shared functions, and any cost and disruption to carve out standalone IT systems, infrastructure and licences.
In looking at a successful integration, these same issues need to be addressed, along with managing any redundancy programme in the context of an alignment of combined cultures, minimising operational risk while identifying overlapping functions and potential efficiency savings, and assessing the costs and disruption required to integrate IT systems and infrastructure.