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Making Divestitures Pay: A Proactive Process to Maximize Enterprise Value Through Subtraction By Terrence Grossman and Jerry Lombardo

Maximizing enterprise value. It is what every investor, chief executive and board member strives for. Whether public or private, companies should operate under a portfolio management strategy in which management continually analyzes their business units. Under Jack Welch, GE lived by this strategy. If a business was not maximizing value and a market leader, it was divested. This strategy is employed by private equity firms to evaluate their portfolio companies, and when successful can maximize both stockholder value and stakeholder relationships. A critical component of this strategy is divesting.


highlights • As part of the continual portfolio evaluation process of where to grow, hold or shrink a business unit, do not be afraid to make the decision to divest. To maximize go forward enterprise value, a divestiture should be based on the anticipated future performance of products, brands and business segments evaluated against the company’s objectives and strategy (Portfolio Management Strategy). • Go on the offense and step into the buyer’s shoes. Proper planning and a rigorous evaluation of strategic alternatives are paramount to developing a convincing value thesis. • Create an integrated communications plan early in the divestiture process that considers the needs of all internal and external audiences, as well as how communications will be coordinated with the buyer. Messages and the methods of communicating play a critical role in how the company, the divestiture and the value of the transaction are viewed by key stakeholders.

• Details matter. Tightly control and coordinate the due diligence and marketing processes to ensure consistency and transparency. Credibility can be won or lost in how a divestiture is executed. • Align the divestiture agreements with operational and administrative capabilities to lead to a quicker and more effective execution of closing requirements. Post-closing stranded costs and transition requirements need to be addressed upfront.


making divestitures pay

D

ivestitures are often a reactive process to right a wrong and there is often a defensive or reactive motive behind the action. As a consequence, companies may not dedicate the necessary time, resources and preparation to this process. Speed to market and speed of execution may become the primary drivers and go forward enterprise value is left on the table.

segments against the company’s objectives and strategy will use divestitures as a part of their overall tool kit to effectively allocate capital and maximize future cash generation to maximize enterprise value.

Companies who employ a proactive portfolio management strategy to analyze and evaluate where to grow, shrink or hold their business based on the anticipated performance of products, brands and business

1. Net Transactional Enterprise Value: Proceeds received from the divestiture transaction (i.e. the value paid by the buyer) is greater than the go forward enterprise value of the divested assets to the

Two ways divestitures create Incremental Enterprise Value using portfolio management strategy.

Fig 1. The balance of Enterprise Value Generation, and routes to realization 1


making divestitures pay

company. Companies that employ a portfolio management strategy, tend to divest closer to maximum Net Transactional Enterprise Value, versus companies that are reactive and tend to divest after Net Transactional Enterprise Value is declining. Process is important. Value will also be lost without a robust and flexible value thesis that has been thoroughly tested and a sale process that is transparent and well thought out.

2. Post Separation Enterprise Value: The return from the redeployment of capital and the go forward operational efficiencies gained from the transaction are greater than the weighted average cost of capital). The primary analytical focus of Post Separation Enterprise Value is the redeployment of capital. However, operational efficiencies that are lost through stranded costs of the divested entity, onerous closing obligations, and inefficient transition service arrangements can suck up value and cause distractions, leading to a suboptimal return.

So what’s next?

A proven four step divestiture process to maximize Incremental Enterprise Value as part of the portfolio management process

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making divestitures pay

Step 1. Evaluation of Strategic Alternatives and Transaction Planning Go on the offense to control the process and think like a buyer

keys to success.

how value is lost.

• A thorough and honest review of strategic alternatives

• An inflexible and complex value thesis that lacks alignment with the support models and analytics.

• A value thesis that is flexible and has an easy to understand road map to the endgame • Robust supporting model that is stress–tested, and takes into account market and competitive issues, tax strategies and transitional requirements

• A process that becomes reactive due to lack of planning, leadership and structured project management • Preconceived notions that lead to a halfhearted and cursory review of strategic alternatives

• Clear leadership vision throughout the organization

• The wrong people are involved in the process

• A day one plan that addresses customer, vendor and employee concerns to maintain value in the divested entity during the process

• Hidden or competing agendas that can cause leaks, distractions, delays and loss of confidentiality

• A balance between speed to market and confidentiality

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making divestitures pay

Step 2. Due Diligence and Marketing Credibility is won or lost and details matter

keys to success.

how value is lost.

• Transparent process with the same rules of engagement for all potential buyers

• The value thesis falls apart under the scrutiny of due diligence

• An integrated external and internal communications plan that conveys consistent messages and supports the value thesis

• Lack of control during the marketing process leads to inconsistent messaging at different levels of the organization

• A centralized and tightly monitored data room that anticipates what potential buyers require

• Senior management team is not fully engaged as the face of the organization

• Carve-out financial statements that reconcile to the value thesis and supporting models • Quick and accurate responses to requests

• An incomplete or poorly structured data room and due diligence quality control process where buyers receive inconsonant information with errors

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making divestitures pay

Step 3. Transaction and Separation Execution Proactively lay the groundwork for the new normal

keys to success.

how value is lost.

• A streamlined and centralized project team that is proactively focused on requirements and removing obstacles to close

• Minimal input from finance and operations during the negotiation process leads to ambiguous and inconsistent closing conditions that cause delays and incremental support costs

• Covenants and post-closing contingencies that facilitate operational objectives for separation • The parameters for the buyer’s post-closing transition requirements are clear and agreed upon prior to the commencement of the closing process • Speed to close with minimal disruption of the ongoing businesses

• Lack of focus or a proactive roadmap hinders closing execution as deal fatigue sets in • Leadership fails to communicate the new normal, creating a gap between separation execution and ongoing operational requirements

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making divestitures pay

Step 4. Post-Separation Capitalize on the opportunity to add value to the go forward enterprise

keys to success.

how value is lost.

• Stranded costs that remain after post-closing are aggressively attacked and eliminated

• The organization moves on and operational post-closing requirements become an afterthought causing friction between the company and the buyer

• Post-closing operational and transition requirements are proactively addressed minimizing the transition time and distractions to the go forward business • A well thought out plan is in place to address post-closing adjustments and contingencies to maximize cash inflow or minimize cash out-flow

• Inability to balance efficiencies with value creation requirements creates a drawn out post-closing process and distractions to the go-forward business • The focus on eliminating stranded costs is narrow and an opportunity to drive enterprise wide cost initiatives is lost

• Leadership and the organization seamlessly transition and refocus on new opportunities and effective redeployment of proceeds through an effective communications plan

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about the authors

Terrence Grossman

Terrence Grossman is currently a CFO Partner at Accordion Partners where he specializes in leading corporate carve-outs and transition services on behalf of the firm’s private equity clients. Terrence has over 20 years of senior level consulting and industry experience and focuses on leading challenging transactions or financial transformational processes. Terrence is best known for gaining traction in these complex situations by removing roadblocks and driving to an end game. He has been involved in or led over 20 divesture, sales and privatization processes including the sale of GMAC Mortgage’s origination and capital markets platforms to Walter Investment Management; the sale of the Disney Stores North America, by The Children’s Place to Walt Disney and the sale of Tommy Hilfiger to funds managed by Apax Partners in an LBO. Accordion Partners was awarded 2013 Consulting Firm of the Year by the Assocation for Corporate Growth.

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about the authors

Jerry Lombardo

Jerry Lombardo is a seasoned financial executive who is results driven with a keen sense of urgency and more than 20 years of experience comprised of hands on international treasury, finance, accounting and business transformation experience in a broad range of industries, including large and middle market companies in financial services, manufacturing, and consumer products. Jerry has extensive experience leading finance and treasury departments through transformation, including more recently managing liquidity and funding, and assisting in the transformation of the global treasury organization for Ally Financial, a $180 billion plus global financial institution. Prior to working for Ally Financial, he held a financial executive role with Cerberus Capital Management, one of the world’s leading private investment firms, assisting their portfolio companies in the transformation of their business planning, forecasting and liquidity functions. Jerry also served as the CFO, with oversight responsibility for the accounting, finance and treasury departments, of Refco, a commodities broker dealer. Earlier in his career, Jerry provided business advisory services to CFOs in the areas of event readiness, process improvement, back office transformation, financial planning, and liquidity management for more than 10 years.

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Accordion Partners provides corporate and operational finance and interim CFO leadership services to private equity portfolio companies.


New York | Dubai 866.595.8806 / accordionpartners.com

Making Divestitures Pay  

Prepared by Accordion Partners

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