For a long time, divestment carried with it a negative connotation. There was widespread belief, particularly in Asia, that companies divest because of poor performance. This misconception is now giving way to a growing recognition among corporate executives that divestment has an important role to play in corporate strategy, whether in good or bad times.
The EY Global Corporate Divestment Study 2018 found that a record 87% of corporate executives globally are considering a divestment within the next two years. Across Southeast Asia, 88% of companies have a similar intent.
While there appears to be a spike in the intention to divest, however, it often takes longer for things to move from boardroom decision to execution. Often, corporate executives prioritize securing the best price for the deal over the speed of execution.
This is understandable, but companies that overly emphasize chasing the highest price run the risk of having to deal with deteriorating business performance of the divestment target entity during the sale process. Such unexpected development can erode the value of the entity, said a-third of the corporate executives from the abovementioned survey.
Clearly, there is a need for speed in execution – and for proper due diligence. To drive better outcomes and value, a fine balance between the two is needed. How then can divestment strategies be executed with more precision and efficiency to preserve or even increase the value of the deal?
The lack of fully developed diligence materials can erode the potential buyer’s perception of value. Where the divested business was not presented as a stand-alone entity, potential buyers were “scared off” or were prompted to estimate more conservative stand-alone costs
A compelling narrative
Firstly, sellers should strive to see the deal from a potential buyer’s standpoint. Looking at the business’ critical value drivers from an outside-in approach aligns these drivers with investor priorities and often helps to control and expedite the divestment roadmap.
According to the survey, the lack of fully developed diligence materials can erode the potential buyer’s perception of value. Where the divested business was not presented as a stand-alone entity, potential buyers were “scared off” or were prompted to estimate more conservative stand-alone costs.
Storyboarding the value proposition is key. The following can help accentuate the attractiveness of the asset during the diligence process:
- having clarity around the business or parts of the business being sold
- preparing carve-out financials
- working to identify where the possible synergies lie
- highlighting opportunities to reduce costs, improve supply chains, or expand offerings or customer base
Storyboarding also helps potential buyers to focus on the upside, even as the seller builds defensible arguments for perceived buyer risks.
Secondly, sellers should adopt the first mover advantage when it comes to tax. Reviewing historical tax positions and analyzing pre-sale restructuring and taxes at transaction from both the seller and buyer perspective prepare both parties at an early stage. These steps will avoid lengthy pricing discussions at the eleventh hour.
Identifying and communicating tax upsides for both parties in a divestment as well as being transparent upfront with buyers on potential tax risks can help to improve negotiations and unlock additional value to all parties during the transaction.
Sellers should complete their tax assessment before the buyer diligence commences. Where time and resources are limited, sellers should focus on the jurisdictions that are most material to the deal, ensuring that any tax risks and challenges are anticipated early and managed prior to the buyer making their own quantifications, which invariably would be conservative.
The party that can best harness technology in the sale process often holds bargaining power
Rigor through analytics
Thirdly, sellers should embrace the use of data analytics in divestment and post-divestment decision-making. The abovementioned survey reveals that those who use analytics are likelier to achieve a higher-than-expected price for the business being sold and to close their deals ahead of schedule.
With data analytics, diligence time can be shortened due to the availability of more in-depth analyses and clarity around business performance. Sellers are able to pre-empt buyer scrutiny and challenges, and most importantly, can avoid being caught off-guard by the buyer’s knowledge of something that they should have known about the business.
Mapping operational improvements and synergies into a post-divestment model with the use of analytics also positions the business positively for the sale.
The party that can best harness technology in the sale process often holds bargaining power. In a real sale scenario, a medical device company had decided to divest its business. The first step the company took was to get a clear picture of what the workforce would look like post-separation.
The company then used analytics to complete operational improvements, synthesizing financial reporting, benchmarks and operational information to increase EBITDA. The company was able to capture a sale price at 18% above expectations for the business.
Underpinning all of these is communication between seller and buyer. Collaborating with the buyers, demonstrating flexibility during the diligence process, being forthcoming with data and identifying areas for value creation post-sale, reaps higher valuations.
By focusing resources on key value drivers of the divestment execution strategy, the right balance may be found along the speed and value continuum.
About the Authors
Sandie Wun is Partner of Transaction Tax and Daniel Tan is Partner of Transaction Advisory Services at Ernst & Young Solutions LLP. The views in this article are those of the authors and do not necessarily reflect the views of the global EY organization or its member firms.