Yesterday, I talked to you about how to decide whether a trade sale, a spin-off or a carve-out is the right exit to maximizing the value of a divestiture. Today, I will discuss the attributes to evaluate when considering your divestiture strategy.
In its “2014 M&A Report: Don’t Miss the Exit” report, the Boston Consulting Group authors pinpoint three factors that are critical for CEOs and their corporate development teams when determining the optimal divestiture path — the selling company’s situation, the asset’s attributes and the likely conditions in the market. The seller’s financial strength, profitability and overall strategy, the asset’s quality, core business and innovativeness and market volatility, valuation and cyclicality need to be combined to choose the best divestiture strategy to pursue.
To begin with, companies need to consider their own financial condition. Highly-leveraged companies that opt for a cash-generating trade sale or a carve-out please markets who anticipate lower debt burdens and renewed growth from renewed levels of management focus and investment in the parent company’s core business. But while trade sales are relatively simple to execute, carve-outs are not. They’re also much more nuanced. Markets pay close attention to how large a share the parent company is planning to retain and what the cash generated is going to be used for. The data shows that if the answer to both is “more for the parent company”, the louder the market tends to cheer.
Companies also need to evaluate the attributes of the asset it is intending to dispose of. While trade sales of unrelated assets may make sense for cash-hungry corporates, releasing a top-notch, highly profitable subsidiary lost in the middle of a sprawling diversified business may require a spin-off or a carve-out to maximize its value. The same holds true for the more innovative of a company’s potential disposals. Assets that are better innovators scream for a carve-out, selling a growth story to the markets and helping the seller reap the rewards of future earnings streams.
Last but not least, market conditions need to be factored into the decision of how to divest. Volatility, valuation and an analysis of where we are in the cycle all help determine which option to pursue. In highly volatile markets, pursuing a trade sale or a spin-off makes better sense than a carve-out with its IPO component. When market valuations are high, trade sales and carve-outs can be more rewarding, cash-wise, while cashless spin-offs are suitable for any valuation environment. While cyclical market upswings favor carve-outs, downswings favor spin-offs.
Each divestiture finds itself subject to a combination of a set of its own factors and characteristics. Mastering the variables and plotting the best course is key to its success. But what about flexibility?
Multi-track is the Way to Go
Nowadays, companies are increasingly pursuing a multi-track approach when it comes to divestitures. While that might sound onerous, often it’s not. Whether it’s a trade sale, a spin-off or a carve-out, each option follows similar data analysis, material presentation and due diligence processes, so the amount of time and resource dedicated to a multi-track strategy is not overly demanding. In fact, it’s sensible. Market conditions have a nasty habit of changing suddenly. Leaving your options open as to which strategy to pursue until it’s quite late in the game has significant advantages. You boost your chances of getting it right.
Allan Cunningham is a senior media executive who has spent the last 15 years of his career working for some of the world’s most respected M&A and Private Equity media companies including Dow Jones’s publications Private Equity Analyst and VentureWire and most recently, The Deal. He has built a number of successful digital and event content businesses, both subscription and sponsor-supported, delivering information and content-marketing services to clients in the M&A and broader deal ecosystem. He recently struck out on his own and launched Rowayton Press, a multi-platform media company focused on the private capital opportunities in emerging and frontier markets. Mr. Cunningham holds a Bachelors degree from Liverpool John Moores University in the UK.
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