The plan included shedding lower-margin, slower-growth products associated with the carve-out, particularly those linked to other business units at the software company, and shifting sales and marketing resources toward newer products and services. The seller learned from this mistake, however: this was the first in a string of planned divestitures, so the corporate-development team made sure to validate and adjust historical allocations before bringing other assets to market.īy contrast, the executives at one software company developed an ambitious yet attainable value-creation plan for a business unit that the company intended to carve out. Sophisticated bidders quickly discovered the error, and the seller was left at a disadvantage during negotiations on the transition service agreement. Days after the offering memorandum was released, a round of deeper financial analyses revealed that the corporate allocations used to generate that estimate were deeply understated. In its marketing materials, the seller provided an estimate for the cost of transitioning the asset to potential buyers. The leaders of a complicated aerospace divestiture went straight to the marketing task before fully evaluating the upside potential and sources of value for an asset on the block. Separations completed within 12 months of announcement deliver higher excess TRS than those that take longer.
In doing so, sellers are less likely to leave money on the table or to introduce skepticism among buyers about the information being provided about the asset, which could kill a deal. Of course, this approach will work if the asset in question is a stand-alone entity with a strong track record-for instance, if it is a distinct business unit within a larger conglomerate that overlaps minimally with other businesses in the portfolio.įor most divestitures, though, there’s a better way: start by fully defining the asset in question-particularly the financials involved-and considering potential disentanglement issues before launching any marketing efforts. They engage a deal team, retain an investment bank to support the sale process and evaluate the potential universe of buyers, and develop a ten- to 20-page document outlining investment highlights. Once they get permission from the board to pursue a divestiture, business leaders tend to go right to the marketing activity. Segmenting the separation process in this way can help business leaders better understand where to begin and where to focus their efforts-thereby increasing the odds of divestiture success.
#HOW MANY DEGREES OF SEPARATION HOW TO#
For instance, a company that wants to sell a business unit must identify key characteristics of the asset in question so it can consider how to disentangle it from others in the company’s portfolio while simultaneously deciding on the valuation story to tell potential buyers. Our research and experience in the field suggest that, to get unstuck, business leaders need to break the divestiture process down into three interdependent but distinct activities: defining, marketing, and disentangling the asset in question (see sidebar, “Parting words and deeds: Critical separation activities”). Meanwhile, delays can diminish an asset’s value or scuttle deals altogether. So, when they get the green light from the board, many find themselves stuck in neutral-unsure about where to put their energy, which decisions to make first, and which tasks to prioritize. In most cases, however, business leaders allocate more time to the question of whether rather than how to divest. It must consider the scope and timing of the transition while incorporating different financial and buyer scenarios. The team should define the universe of potential buyers and prepare marketing materials that tell a consistent story.ĭisentangling the asset: The team needs to assess the risk from the separation to the various stakeholders, processes, and functions. McKinsey research shows that risk premiums decrease and valuations increase when sellers take this approach. Marketing the asset: The team needs to build a narrative that takes the buyer’s point of view of the potential value they may gain from the asset being divested.
Business leaders must manage the separation of assets through three interrelated but distinct activities.ĭefining the asset: The company must convene a cross-functional working group to define what is actually being divested-for instance, confirming deal boundaries, carve-out financials, and legal structures.
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