If your company wants the financial benefits of a sale, but is wary about an actual M&A deal, you might consider a smaller-scale alternative. Strategic divestitures, or sales of specific divisions or product lines, allow companies to raise cash without making an outright sale. These transactions can be particularly effective for companies that intend to go on the market eventually, but want to wait until the economy recovers.
Both Big and Small
Strategic divestitures enable you to maintain control of your company’s operations while benefiting from the cash generated from an equity carve-out or unit sale. They’re also less complex, time-consuming and onerous than M&As.
Not surprisingly, they’re popular with well-managed companies. In just the past few years Sprint Nextel successfully spun off its local telephone operations as Embarq Corp.; Agilent Technologies sold its semiconductor unit to a group of private equity investors, who renamed the unit Avago Technologies and took it public; and IBM sold its PC business to Lenovo Group.
Strategic divestitures can work just as well for middle-market companies. If, for example, you want to consolidate your company’s strengths, you might spin off a profitable division whose products don’t integrate well with other lines. Or, if an underperforming unit with decent fundamentals is a drag on your financials, you could boost your company’s value by selling it. Spin-offs even have tax advantages, since neither the selling company nor its shareholders normally are taxed on the transaction.
Choices and Complications
Depending on your company’s financial needs and the assets it plans to sell, you may make strategic divestitures in one of the following forms:
- Spin-off. Here, a unit or division becomes a separate company with the same shareholders (at least, initially) as the parent company.
- Carve-out. Similar to a spin-off, a carved-out company must have a new set of shareholders so that sale of its stock raises cash for its seller.
- Direct unit sales. In this case, a unit or product is sold directly to another buyer, typically for cash.
Whichever type of strategic divestiture you make, be prepared for complications. Potential challenges include technical separation, where a company spinning off a division needs to decide how it will separate such services as IT and back-office support. (See the sidebar, “Transition decisions.”) Dividing client and supplier contracts between the spun-off entity and the parent and managing employees who continue to work for both entities are also potential problem areas.
Making Wise Moves
Although a well-chosen divestiture is likely to produce at least some of the anticipated results, be realistic. Costs could rise after your spin-off because you’ve lost economies of scale with employee health insurance or supplier contracts. Or you may find that the loss of certain staff members reduces short-term productivity. In these situations, the important thing is to focus on the sale’s long-term benefits.
Also, don’t let your entire company become consumed with your divestiture. Assign the project to a small group of executives and managers to prevent employees from getting sidetracked from your core business.
Partial is Better Than None
Even if your long-term goal is to sell your company, don’t consider strategic divestitures a compromise. If anything, slimming operations and strengthening your balance sheet will improve your company’s future sale prospects.