Many companies make the mistake of assuming that divestitures are simply acquisitions in reverse. In fact, divestitures are often more complex than acquisitions and generally take place under tighter deadlines.
Investors reward companies for making good divestment decisions. They understand that carve-outs can enable companies to focus on their core businesses and give sellers new resources with which to pursue growth strategies. And that will produce better shareholder returns. Yet, not all carve-outs go as efficiently as they could, further distracting and costing the core business.
Developing a Winning Divestiture Strategy
What differentiates divestiture winners from laggards? The companies that excel at divestitures take a systematic and proactive planning and carve-out approach to minimize disruption to their business. These approaches are informed by the defined business strategy, such as improving product mix, expanding into new geographies, or building new enterprise capability, to maximize returns.
Importantly, smart sellers don’t make the mistake of starving the business units they plan to divest. Instead, they invest the time, talent, and resources to help those businesses demonstrate they can reach their full potential, which helps attract bidders and ensures the divestitures command the best possible price.
Better Options for Technological Disentanglement
In almost all carve-out scenarios, reasonable divestors will have concerns about the challenges they may face disentangling and unwinding the technology footprint of their business operations. By addressing these potential obstacles early on, sellers can broaden their pool of potential buyers and make sure divestitures go as smoothly (and profitably) as possible.
One traditional approach is for the seller to offer a transitional services agreement (TSA) to the buyer of the divested business, while the buyer readies their resources and technology platforms for the acquired company. The scope and duration of TSA services are dependent upon the size and nature of the carve out, such as an asset sale, spin off, or joint venture.
Unfortunately, TSAs can turn into giant headaches for the divesting company. In many cases, sellers vastly underestimate the time, costs, and ongoing entanglements associated with providing the IT support services spelled out in the TSA.
To avoid this pitfall, three alternative paths exist for divesting companies:
- Sellers can bundle all the required processes and platforms into the divested entity ahead of time so that they don’t have to provide any ongoing support once the deal is done. This avoids TSA headaches entirely although it requires investments.
- Sellers can offer to provide IT services to the divested entity through a standard service contract that treats the divested unit like any other external customer. This works when the seller is organized to provide this type of service.
- The simplest, easiest, and most cost-effective option for many sellers might be to engage a managed services firm to accelerate the transition process and provide ongoing service management to the buyer. Most managed services firms are accustomed to working on multi-year delivery contracts. However, many cannot provide the speed that both divesting and acquiring organizations require.
Fortunately, new solutions for divestments have emerged to deliver TSA-ready advisory and platform services to the sellers (and buyers) from due diligence right through to closeout. These solutions can help divesting companies avoid the costs, distractions, and headaches of typical TSA agreements.
Originally published in Chief Executive magazine.