How to Deliver Maximum Value from Divestitures

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome. Today I'm here with Toby Tester, M and a consultant and project manager with BDT. Toby's got 20 years of experience delivering strategic financial and operational value for M and A deals. He's designed operating models, carve out strategies post merger integration plans, and has worked on integration, management, office development. Today we'll cover how you can deliver maximum value from a divestiture. We will discuss how divestitures like acquisitions can become a positive and transformational process. How are you doing today Toby?

Oh great. Very good indeed. Good to talk to you.

Keith on My pleasure. So our goal today is to cover how we can deliver maximum value from a divestiture and also discuss how divestitures like acquisitions can become a positive and transformational process. Maybe we can start off with just telling us a little bit about yourself and who is beyond the deal.

Yeah, sure. Certainly just very briefly about myself. Let's see. Yes, as you say, I've got about 20 odd years experience now working in mergers and acquisitions. It's been an incredible journey, a lot of good experiences, so thankful for it. And obviously to work with so many organizations around the world and just to explain who beyond the deal is. And by the way, it's beyond the deal, we also shorten it to BTD or BTD Consulting. And we're a group of M and A professionals who in actual fact are dotted around the world. I'm actually based in Australia, but we have representatives in the uk, Germany, Asia, the United States and we provide divestiture services but also acquisition related services to any deal that might be going into industry independent. So what we're really there for is to basically confirm the why of a design of a particular M and a strategy, but also the how part of it and that's where the execution of the deal as well. So we provide services there. So that's on both the buy side and the sell side. And you know, we've been operating for nearly 20 years now.

Great. So that's what drew me in. I noticed you guys had a lot of great content out there, great perspectives and seem like a really good understanding of how deals work and just a very intimate approach in terms of the way you work with companies. And I think with our topic particularly, I came across an article called the New Divestiture Playbook. Maybe you can tell A little bit. In terms of what prompted you to write that article.

Yeah, that was kind of interesting one because I'm sure, like a lot of people who work in the M and A field work on the buy side a lot, but also on the sell side. Now, I've done quite a few divestitures, a few dozen now. But what prompted me to write this was I also work obviously on the buy side and working with a seller who's actually divesting an asset. One of the things I've noticed, and I'm pretty sure other people notice as well, that sometimes they're not exactly the seller's actually not always best positioned to set their asset. They got ready to make it available for sale, in other words, that they're. They could have done more to make the business ready to put it on the block, to make it a saleable asset and making sure that it's as attractive as possible as a potential business that could provide a future profit for the purchaser. And I sense more could have been done. And really and truly you shouldn't have to depend on, for example, transitional service agreements and the like. You know that people think that that's something that just comes with typical divestitures. But no, not really. That's kind of like a last resort thing. And you really kind of need to make sure that the business can stand as best as possible on its own without the need of transitional services once a deal completes.

Can we talk a little bit about this traditional view? And I want to get a good understanding of what the problem is, so maybe we can elaborate how the M and A industry views divestiture currently as a strategy.

Yeah, by all means. I think what happens is that, and this is how I see it, is that I don't think divestitures really is a strategy. Certainly acquisition is. I think the way divestitures, and I've often seen it happen, is it tends to be a bit of an afterthought. I think that often I think executives might find themselves holding onto assets for too long. I think possibly because it's a concern about corporate earnings or a failure of some kind, but there is a tendency to hold onto them too long as a result. There can be certainly a situation where corporate earnings are so diluted that it's being a drag on overall profitability. Then organizations can find themselves basically putting up a business for sale and wanted to get it over and done fast as possible. But in doing that, what they're really doing is actually basically trying to get rid of the asset as soon as they can. In other words, it's a bit of a sort of a fire sell type approach. And that's not really the best way of going about it. It's more understanding divestitures as being value creating opportunities just like acquisitions. In other words, take a step back. Here's an opportunity to obviously we've got a business that we'd like to sell so that we can actually repair the balance sheet in some way, put some cash back into the business. So how can we go about putting our best foot forward and making this business as an attractive business as possible to potential acquirer?

We have a business unit that we identified as either non performing or just not a current strategic fit. Walk me through those steps.

The traditional view is to essentially not think of divestitures like in the same way as acquisitions. In other words, value creating opportunities. I think simply think of divestitures as another way of profiting. So by looking to make sure you're extracting as much value from the sale of your business as possible. That's the fundamental premise and there's a number of steps involved in terms of how you might go about that. But the idea is quite simply, take a step back. Let's not try and just get rid of the asset or just do the deal. Let's just take a step back and see how can we go about attracting more or getting more value or at least communicating more value to potential acquirers and therefore going down a value creating path.

Essentially, we're talking about creating a strategy to maximize the value of the asset we're divesting of.

That's right, yes. Look, it's a very simple idea really. All we're saying is that when you start from this, don't rush it, don't go and think in terms of mentally what can we do to actually get rid of the asset to sell as fast as possible? Because if you do that, you're really just basically selling the business for a song setback. What can we do to actually maximize the value of this business so it's as attractive as possible to potential purchases and therefore it's a win win for both sides. Because there's a win on the seller side, you're getting a premium, an extra premium. By taking a little bit more effort in terms of how you present the business to potential acquirers and the acquirer side, you're also giving them the tools by which they can actually profit themselves when they take over the business.

In your article New Divestiture Playbook, you described every divestiture of Having buried treasure. Can you explain this concept and what it means for organizations looking to divest?

Well, buried treasure, it's just a term. Look, I think there's a fundamental premise is that when you actually got an asset, sometimes you're not aware of what actually makes your own business unique because you're very close to it and what other people might find attractive. So it's understanding what a potential purchaser might be interested in and actually walking in their shoes, thinking in terms of what would interest a buyer in terms of the business and help understanding that further and then communicating that back to a potential acquirer. So really what I'm saying there is that there are certain things where it's certain capabilities aspects, whether it's in technology, whether it's the people that effectively are a very critical part of the value of the business. And it's effectively communicating that back out to potential acquirers so they are aware that's where the value resides. So it's actually going through active value communication exercise. When you're trying to sell a business.

How do you get the mindset to do that? Because I think you identify the problem is you're too close to the business and you're living with it every day. How do you step back and get into a different mindset to find those opportunities?

Yeah, so basically what I suggest is you do is to take what I call a kind of a two step path. One is a value preparation step and the second part is a value communication exercise. The value preparation is setting up proper governance around the divestiture, making sure that you're organizing this as a project with the appropriate team, properly staffed, but then defining the way the business works in an operating model sense. Because when you start diving into the operating model, that's when you start unpiecing the parts of the business that actually do have value in them and then you're actually preparing that value, ready to be communicated. Then the other part to this is the communication side, which is when you start looking at the business value drivers. So it's actually articulating what are the value drivers in the business, how those value drivers could be potentially be mapped to a potential buyer. In other words, saying here are certain capabilities we have here. These could potentially be mapped into your capabilities, particularly for the strategic buyer. And then the other part to this is to say, well, we've got this operating model. We believe there's some underinvestment in certain parts of it. These are the things that you could potentially be doing to say, hey, if there was a Little bit more investment here, a little bit more investment there, then this should actually either reduce costs or increase revenues. And here's some business cases that actually show you how that could be done. So effectively what we're doing here is we're pairing the value to say here's the operating model, this way it looks and unpiecing it into all the various parts. And then the next part is the communication side. Say here are the business value drivers here, the certain capabilities. And not only this, we've actually assessed what the potential value, where the opportunities might be to actually improve value if you were to invest in certain parts of the business. Ultimately, all this is to do with controlling the wholesale agenda. So effectively you're on top of it at all times, controlling the narrative, controlling the process, and also controlling the key messages that you would like to make about this business to potential acquirers. So effectively they're listening, they're understanding, they're hearing in terms of what the opportunities this business provides. But at all times you're on top of the agenda.

Starting with the operating model. What would be the specific steps a company would really need to take to get that going?

Yeah, so I think to do the operating model effectively what needs to happen is to break the business down. It's basically doing operating model analysis and it's time well spent. This is not just basically understanding what the organization structures like or what it should look like. It's also breaking down for potential acquirers, the actual value chain operation. So effectively what is the opportunity to order and order to cash processes, what they look like and breaking those down, then breaking down the technology components of the business, the supplier arrangements, how the suppliers operate with regards to the organization, and also where the assets are located. Now this is an operating model exercise and what you're effectively doing is you're just simply breaking the business down into its nuts and bolts. And then you can actually start communicating what those nuts and bolts are about. But effectively really is a logical way of breaking it down so that people can actually see and have that kind of clarity as to how this business operates and reduces the amount of questions that people might have during due diligence because they can see it for themselves. That's all part of the whole setting up the business for sale and part of the whole vendor due diligence exercise.

Okay, so we're moving from once you start planning out these carve out steps and that gets emotion in parallel, we're looking at the actual communication and this is when we're going to start doing sell Side diligence. Can you walk me through steps of sell side diligence?

We know that potential buyers will do their own due diligence so they can understand and evaluate what they want in the buy. But all I'm saying here is it really helps if the seller does the same thing because it does shape the ultimate conversation. So get ahead of the game, perform the sell side due diligence. And I think really what that does is it simply reduces the surprises that you might get during the transaction. Because. Because that's the last thing anybody wants is surprises. The other thing it does is it really introduces, it increases the size of the pool of potential buyers when you do sell side due diligence. And also it reduces the threat of buyers trying to negotiate the price down. So effectively by doing this, you're actually once again controlling the agenda. I think the other big thing about sell side due diligence is it really does shorten the time that buyers need to spend on their own due diligence effectively. Instead of going through a data room and navigating through that really you're trying to do is cut out the amount of work that they need to do. So they naturally will do due diligence, of course, but try to cut that time down as much as you can. And really again, it comes down to controlling the agenda for the sale.

This whole done in house, are we bringing external people doing third party Q of these, all that fun stuff?

Yeah, exactly.

Okay, so we start prepping this stuff, which is good. This is kind of formalities any banker.

Would come up with. It is kind of formality and I think that's the more the familiar side of it. There's a few things that I'll go on which is a little bit more unfamiliar, but that's a familiar side and certainly something you should be doing.

Let's talk about defining the value. I'm curious to know what are some of the steps. I think this is where our conversation gets a little bit more unique in terms of that mindset.

It is, it is. I see this as incredibly valuable for purchases and it's also a very good exercise for the sellers because this is where you start diving into this whole notion of buried treasure. What I'm saying here is that the financial aspects of a divestiture are critically important, but I think it needs to be supported by an operational understanding of the way the business delivers value to customers. I think it's that you want to be able to uncover buyers can actually see the potential themselves and really say, well, yes, I Can see it potentially in the financial statements, etc. But let me actually see what it looks like in the operating model. The business value definition exercise is an exercise that's meant to communicate and educate. What I'm saying here is go down, take the whole business down to its essential nuts and bolts, say, well, who are the suppliers, what are the locations, Describe the value chains, what are the skill groups that are used in the organization, the technology, how people remunerate it, the policies and procedures, and then bring that all together into an operating model view so it looks visually strong. I'm not just talking about bits of piles of paper. I'm talking about interesting graphics here or pictures that help tell the story about the way this business delivers value. That's what I call business value definition.

That's where you find your buried treasure.

That's the buried treasure. You see, it's actually just uncovering it. It's there, it's sitting there, but it's effectively bringing it, defining it, communicating it. And then when you're communicating, you're educating potential acquirers as to what is it about this business that makes it special and unique, that actually that you'd want to be able to acquire. So you're making it easy all the time, easier for the acquirer to make that to do their own due diligence, but also to see and tell their own stories about where the value lies in the business. There's a paper associated with this called the Divestiture Playbook. And I explained that pretty simply. Obviously there is a much more detailed playbook behind this, but it's a simple exercise, but a much needed one. I believe when you're going through the divestiture process is really unpiecing the business so that you can break it down. By breaking it down, you're actually really defining the detail, the business value in its respective nuts and bolts. And effectively what you're doing is you're communicating and you're educating.

Great. So I'm going to make a point in the show notes to link to the article so that way people can check the outline out of this and actually how to approach it. How do you see the landscape of divestitures changing? Do you think more organizations will begin conducting them as a strategy for growth and transformation?

I have been reading that divestitures are going to be increasing in the years ahead. I think it's really because I think people have become more savvy now in terms of looking at their balance sheets, looking at their business models and saying, well, what can we be doing to streamline our operating models, how can we maintain, make sure we're only operating in the core businesses that we want to operate in and then divest the assets that we are no longer part of our core business. I have been aware of the fact that I think the amount of divestitures is going to increase over the forthcoming years. For example, I've got something here, I think another consultant firm did that said 84% of companies plan to divest within the next two years. So that's a claim that's made. Certainly I think it's true insofar as that. I think there's a lot that is happening out there. I think a lot of organizations are divesting. And so surveys have been done which indicate an increase of this. And I think it's partly due to trade wars that are happening, uncertainty about tariffs. I think there are some geopolitical concerns that are happening out there. Look, there's already talk about potential recession in the United States. And each one of these things gets organizations to think we'll say, well, what can we do to streamline our own operating models so that we're more agile and we're more focused and more ready to meet potentially what might be more turmoil in the economy in the years ahead. And so they'll be keen to say, well, look, if we have certain assets which aren't performing as well as they could be or could be better under new ownership, then I think they'll be thinking about this. As I said, I think we're going to see more divestitures happening in the next year or so. At least.

I want to take even a further step back and let's be visionaries here for a minute. Let's think about the maturity curve of divestitures, but maybe we can contrast with acquisitions. Because what I've seen over the years, companies are learning that corp devoted and integration shouldn't be two completely separate units. And if we look at any of the very mature acquirers, Cisco and Google, you essentially have integration folks leading the process. And they're involved in the deal very early. They're validating the value drivers and the overall investment thesis to make sure that all these assumptions can actually be become things that really happen and get delivered on. We've seen that sort of evolve and change and I think that's just how things have evolved over the past decade with the experience and just the natural path. I'm curious, taking that visionary approach, how do you see divestitures maturing over the next decade?

I think the people will start seeing divestitures maturing because they will see it as more as a value creating opportunity, just like acquisitions. In other words, I think one thing that's happening pretty clearly, by the way, I think where corp dev specialists, organizations are becoming more savvy, generally speaking with respect to acquisitions. In other words, they have their playbooks, they understand the risks associated with the exercise and they're being very professional in terms of the steps they take. And they've got their processes mapped out, responsibilities defined so they can manage it appropriately. That's the same thing that's going to happen with divestitures. In other words, instead of divestitures being an afterthought, they will look at divestitures as value creating opportunities. And to go through pretty much the steps that I've been discussing here, which is how can we be better to prepare a business for sale and then how can we better communicate the value of it? It comes down to a similar sort of a playbook idea whereby it's not something ad hoc, you're going through some very deliberate steps to set the business up so it's actually out there on the block available for people to look at and potentially want to acquire. And then the second part is actually how do we communicate its value? I see that playbooks, more sophisticated playbooks that will get developed, that will guide organizations better through this process and effectively both sides win. So in other words, the seller will obviously attract a higher premium for the business, but also for the acquirer because they'll have the tools provided by the seller from which they can use those tools in order to profit from the business in future under new ownership.

That's the bottom line. Instead of a lot of times today we think of divestitures as cutting off the loss leader, cutting the anchors to more of that value creation opportunity and looking at those higher premiums, which could overall be a very net positive thing for companies.

It's a net positive. I'm looking at it very much from a win win perspective. The seller's winning because obviously you're going through a deliberate process where you're preparing the business for sale and then communicating its value to potential acquirers. And the acquirer benefits because they know what they're getting. They're much clearer about where the value lies in this business, but also they're getting the means by which they can actually capitalize upon it. In other words, say here are some opportunities which the sellers define that we could be doing. The seller didn't do them, but we could take over those opportunities and Go ahead and exploit them, but effectively they've already been mapped out and detailed by the seller.

Can you tell me about a divestiture that went off the rails and lessons you drew from it?

Yeah, it's funny. I tell you what, there was one situation, and it's part of the reason why I wrote this paper in the first place. It was about a year ago. I was actually working on the buyer side, and we're looking to purchase a business. And this business was really interesting because it was a digital business. It had a lot of very interesting technology and certain capabilities that the Babu was really interested in. But the interesting thing about it was that the seller kind of went down the path of carving the business out. In a legal sense, they certainly did that. And to financial sense as well, to a certain extent, they did that too. But the business was still operationally, in a very deep sense, still intact with the parent firm. And that caused a concern because the real issue was that they couldn't quite see where the IP was. In other words, the IP really wasn't all that well separated. When I say ip, I mean, I'm talking about data, I'm talking about software, and that really hadn't been. That was still part of the parent firm. And that made the buyer nervous. Say, look, I don't know quite what we're buying here, because it hadn't been separated out in a very clear, succinct way. Now, the seller said, well, look, we could do all this as part of a transitional service agreement, but then that transferred the risk to the buyer. And the buyer was saying, well, look, can we trust this business to give us this ip? How do we know we're getting it? You know, once the sale completes? And the seller was very keen to sell the business, this is it. This is a paradoxical part, but they weren't doing themselves any favors in terms of setting the business up for sale. And effectively the sale didn't go ahead. It did not happen because the buyer didn't get enough comfort to say, I could get this business safely, I can get all its ip, all its operations, and have that at time of sale. Recognizing, of course, there's always an element of transitional services, but you really want to minimize that sort of thing. It's a necessary evil. I know we've got to have it, but you want to make sure it's as little as possible. But this seller, on this occasion, didn't do it, didn't do enough to prepare for themselves for the business to be sold, and effectively lost the sale. We're talking hundreds of millions of dollars here. We're talking an awful lot of money here. And simple errors didn't go down through a proper value creating set of steps in order to set the business up and sell. Had they done that, there would have been a sale and they would have actually got the business off the balance sheet.

I can understand their concern. I hear these TS agreements get complicated. I'm curious on your thoughts about that in terms of ways to really maybe some tips around making them actually work.

Well.

Because you understand it, you know what I mean? And it's not that you can just carve something out clean and not have any dependencies drawn back to the parent company. But it is an awkward thing because you buy the company for a dollar, but then you're kind of screwed all around with your TS agreements.

Yeah. Now, I think the thing with TSAs is that, look, first of all, I think, I think when it comes to divestitures, there's potentially what, 75% of all divestitures have a TSA arrangement of some sort. So they exist. You'd rather they didn't exist because I think from the seller side and the buyer side, you really want to be able to acquire a business clean. In other words, fully standalone. We recognize in real life that can't happen. With regards to transitional service agreement, I think from a seller side, you should always work from the perspective how can we make this as little as possible and as simple as possible. So effectively it means carving out as much as you can, knowing that there are some things you can't separate out fully. Now that could be certain. Technology can't be split out. We understand technology's got a long tail and there's areas there. So what I always suggest is that when it comes to transitional services, always start early. So in other words, you're doing this pretty much pretty close to the beginning because you've already got a carve out strategy. You know that there are some things you may not carve out. That means then you start preparing the transitional service agreement upfront. But the interesting thing is, is that with a TSA is you can actually pick that as part of the whole value proposition exercise, in other words, to say, well, look, here's the transitional services, here's what we can do. And that comes all part of the whole negotiation process. So it's not an afterthought again. So it becomes part of the whole price value proposition in terms of as you negotiate the sale of the business. So my recommendation is always do it proactively. Always try and keep it small and sweet and make it simple. Don't over complicate it with complex charges. Now, I should say that one of the challenges with the course for transitional services is that effectively it puts the seller in a position where they're providing services to an external organization once you close the deal. And of course a lot of sellers never done that sort of stuff before. So how do you go about doing that? You need to make sure that you've got good processes, good quality control, appropriate governance around it to make sure that none of that can go off the rails once the deal is done. So effectively making sure that the relationship to the buyer and seller is a professional, amicable relationship, post deal and the way to do that is making sure that the TSA itself is robust. It's simple, it's direct, but it's very clear in terms of what the responsibilities are of the seller up front and also what the responsibilities of the buyer.

You would start making this during the carve out steps.

During the carve out steps, you start beginning shaping it. Yes. It's not something that you'd want to do say for example, close to signing, or dare I say even after signing. You really want to make sure that is part of the whole set of legal agreements. We appreciate there's a purchase, a sale agreement. We realize there'll be probably a potential of other agreements here as well. But you want to make sure that the transitional service agreement is already been. You've already started drafting it already, putting the schedules together as what that might look like. And you'd be doing that pretty early because you will know pretty early what services will need to be provided post deal because you're not going to be in a position to carve those out fully prior to sale.

Very good. What other tips do you have for a company that's going to do their first divestiture?

Take a step back. Think in terms of what a buyer might be looking for. Walk in the buyer's shoes. What would make a buyer potentially interested in this business? I would be saying that walk in their shoes, always thinking in their terms. And then I would say ensure that you think of divestitures as a value creating opportunity. Don't think of it as do the deal, get rid of the asset type approach or as an afterthought. So think of that as a deliberate value creating opportunity and put the appropriate governance around it. Get the team involved, get them interested, get them excited, get them part of the journey to say here's a new future for you. For the people who are part of that business to say, let's be part of this, Help us make this business as attractive as possible potential acquirers by going through the steps I've been outlining here as part of this new divestiture playbook.

Getting the mindset.

It's mindset, Yes. A lot of this comes down to mindset.

What's the craziest thing you've seen in ma?

Craziest? Oh, my God. Crazy. Well, you know, actually talking about divestitures again, there was one crazy thing that happened about 10 years ago. I was working on the acquiring a small business from another organization and there was a transitional service agreement associated with that. And the business was successfully sold, the deal was completed, and then we're into the transitional service phase. And so, you know, I think it was about a three month period before the TSA would finish, but halfway through that, the seller decided that they needed to do some work on their data center. So they thought, well, let's go ahead and start, you know, retiring a few servers here and start decommissioning a few boxes. So they went ahead and did that, which is all very good, but then they actually, what they really did was actually effectively take out the servers which actually ran the core applications for the business that they just sold. So effectively there was no business, no warning, nothing. And all of a sudden I got phone calls saying, hey, you know, we can't get into the application, we can't process any new customer inquiries, we can't, we can't do any business. You know, we're idle. So it's absolutely crazy situation. So business was totally dead, doing nothing, losing a lot of money.

After the sale. After the sale, they deleted the company.

After the sale, they effectively deleted the. That was being transitioned across. It was sitting on the servers, a few mad phone calls and said, whatever you're doing, guys, in your data center, can you just stop? A few hours later, sure enough, they thankfully actually literally delete the software and the applications and clean up the service. That'd be bad otherwise. It had to be complete. They'd have to get it back from tape. But no, it was there. They basically recommissioned the servers, put them all back in again, and few hours later, mind it was a few hours downtown time, it was all back up and running. But phew, that was a thought. Wow. We got no business, no one's doing anything. So that was a pretty crazy time.

That was pretty crazy.

Yeah.

Toby, thank you so much for your time. I really enjoy the conversation. I think we cover the topic well in terms of maximizing value for my divestiture and looking at it as a net positive event and transformational process.

It is, and it's positive all the way through and that's the way it should always be seen. It's a value creating opportunity.

Awesome. Thanks again, Toby.

Okay.

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