High-performing companies often assess their portfolio and business unit performance to determine opportunities to create value for their shareholders. One outcome of that analysis might be the decision to divest a product group, business unit, or segment.
Companies with strong divestment strategies traditionally outperform their competitors because they can tactically shift their business, change their margin profile, or deleverage their balance sheet. Whether the separation is a sale, spin-off, or IPO, companies navigating transactions often face common challenges that must be addressed carefully.
Purposeful planning and a comprehensive understanding of the potential deal complexities can significantly improve a company’s ability to deliver expected value.
Understanding How Complex a Divestiture Can Be
An early understanding of what group of entities, business units, or products will be included in a proposed transaction helps ensure efficiency in the carve-out process and allows companies to begin operational planning for the eventual separation. At the beginning of the process, roundtable discussions with HR, finance, tax, operations, investor relations, marketing, and IT teams can be beneficial in highlighting potential complexities in the deal. Some of those complexities might include evaluating intercompany or intersegment revenues, determining how the company’s effective tax rate might be impacted, exploring how functions with shared service centers will be transitioned, and determining the impact on reporting units for goodwill.
However, there are many other considerations when preparing for a divestiture. To succeed in realizing the transaction objectives and to maximize value, management must account for the impact to each distinct business function. The table below outlines many of the questions an organization must answer to succeed:
| Key Divestment Focus Areas | Key Questions |
|---|---|
| Transaction type | – What type of separation should you consider based on your company goals? – What SEC and regulatory filings will be required? – Have you assessed the accounting implications of the proposed transaction? – What are the external regulatory requirements to facilitate the timely closing of the transaction? |
| Operations, processes, and systems | – What’s required to ensure the companies will operate effectively upon separation? – How will operating models change through separation? – What are the overall plans to separate company data into distinct systems? – What level of training and knowledge-transfer is required? |
| Governance, risk, and change management | – How will you manage the details of the separation initiative? – What KPIs will be used to measure the impact of the divestiture? – What risk could impact an on-time, successful separation? – How will you ensure consistent, thoughtful communication to employees throughout the separation? |
Let’s dig deeper into three specific questions that will significantly impact the course of the separation and the ultimate outcome:
What SEC and Regulatory Filings Will Be Required?
For a public company, in addition to considering stand-up readiness and Day 1 operations, the finance function of the parent entity may also need to prepare filings and disclosures about the divested business. The remaining company should expect to report on discontinued operations in their annual and quarterly filings and prepare potential 8-K filings with the SEC.
Preparation of these reports and filings takes time and coordination with external auditors. Failing to plan for the right level of support and resources could lead to inefficiencies, missed filings, and potential delays with capital transactions. Additionally, certain divestiture transaction types, such as a spin-off or IPO, require preparation of a Form 10 or Form S-1. The level of effort often required for these filings can be significant.
How Will Operating Models Change Through Separation?
Transactions typically have relatively short timelines to meet board and investor goals. Company management must honestly consider and design operating models that minimize disruption to employees and customers.
Understanding the level of effort involved in preparing carve-out financial statements and planning for operational separation while maintaining business-as-usual operations is critical. Establishing a cross-functional steering committee can play a pivotal role in providing strategic and tactical direction throughout the separation. Further, a dedicated program management function is essential for monitoring progress, communicating decisions, and reporting to the board of directors and leadership teams.
Management must assess whether internal resources have the bandwidth to disengage from their “day jobs” and focus on executing the transaction and standing up the new operating models. Many organizations choose to engage outside support to supplement and enhance their teams through their transaction.
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How Will You Ensure Consistent, Thoughtful Communication With Employees Throughout the Separation?
The separation program management and leadership teams must establish regular forums for communications throughout the transaction timeline. Regular steering committee meetings and messaging provide executives an opportunity to address concerns and collaborate to resolve transaction risks and issues.
In addition, when preparing for a separation, the program management function should involve other stakeholders – such as HR, finance, tax, operations, investor relations, marketing and IT – to deliver clear and consistent messaging to employees, customers, and other external stakeholders. Project managers must also work across functions to develop communication collateral for the separation.
Companies should consider when and how they’ll communicate new employee benefits and total rewards information, and leadership should find ways to share post-separation corporate budgets. Changes to organizational charts and the related talent acquisition plans will likely require internal communications.
Customer and external vendor communications will ensure contracts are transitioned or replicated to effect the separation. Companies that proactively define their communications plans early in their separation journey accelerate the disentanglement process and alleviate potential challenges across stakeholder groups.
Successfully Executing on a Complex Separation
A well-executed divestiture provides a great opportunity for a business to strategically drive growth. To achieve that growth, company leaders must begin by assessing how ready the organization is to achieve the many complex steps required to execute the transaction. Failing to do so will cause disruptions, delays, and additional costs. Moreover, poor divestiture execution can have a significant impact on employee morale, customer trust, and reputation.
An effective, honest assessment, as explored above, helps to position the company to achieve its objectives and execute the separation efficiently. Companies that successfully execute on divestitures often choose to document their success in a divestiture playbook. This serves as a tool to leverage for future initiatives and allows the organization to continually deploy their capability and expertise to return value to their shareholders through divestiture strategies.
To maximize value throughout the transaction lifecycle, contact CrossCountry Consulting.