June 29, 2016
By Colin Wittmer, US Divestitures Leader
There are thousands of factors that can derail a deal. Dealmakers have always used foresight, conviction and experience in building the blueprint for iron clad transactions. Yet, today’s deals are more closely scrutinized. They are being watched for a range of reasons and by a variety of key stakeholders – including activist investors, shareholders and regulators.
To dodge any potential deal-killers, savvy dealmakers are storyboarding all potential scenarios and options available to make sure their deals are value accretive to the organization and are likely to cross the finish line. One primary strategy dealmakers are increasingly relying on is preemptive divestitures (or proactive business segmentation in anticipation of a potential strategic action), which can help ease regulatory concerns, create liquidity and demonstrate to investors a company’s commitment to rigorous portfolio evaluation to create shareholder value.
Clients need to thoroughly understand their divestiture options and realize how they play into the bigger picture of a deal or strategic direction of the business. New technology, and especially the use of data and analytics, allows us to build scenarios for each one of these options. Armed with that knowledge, they can better navigate the challenges that may arise and consider broader options for improving their business through business development activities.
Here are three considerations for divestiture planning around a deal:
- Go Big: Scenario planning needs to go well beyond “the three most likely scenarios.” Dealmakers today need to thoroughly think through dozens of options to play both offense and defense. In some instances, especially for transformative mega deals, it may make sense to have an action plan for the vast majority of businesses in the portfolio. We challenge our clients by asking: Are you prepared for calls to divest certain assets you weren’t expecting to exit? One retail client successfully divested into three parts.
- Look for Impact: When assets are required to be sold as part of the deal process, it’s critical both sides have a deep understanding of the potential impacts that keeping or exiting that business will have on the combined company. How will selling a business to satisfy stakeholders change the growth trajectory of the combined business? Will you reach your synergy goals and targets? Knowing the impact on the combined business going forward, the integration process, the strategic direction and the terms of the original deal are all key elements of the planning process.
- Timing is Everything: It’s not just about the how and why of an asset disposal – but also when. The timing of any divestiture during the deal process needs to be carefully considered or you risk losing value, the upper hand in negotiations and put tremendous pressure on the timeline for closing the main transaction. Thinking through the pros and cons of divesting an asset before a deal is announced, in reaction to a request or even post-close, can have major implications on both the sale and the larger deal.
There’s a lot to consider when deals are under pressure and at risk of being stopped in their tracks. The key is to up the game on preparation before those cracks in the process begin to emerge and plan well ahead to strengthen a transaction’s odds of crossing the finish line.