Getting the Best Value from a Divestiture Process - 30th Nov 2017

By: Andrew Baird

We frequently undertake an Acquisition  search process on behalf of clients, but in our experience we have found that the same targeting skills that work for acquisitions in identifying the "perfect fit" between companies also serve well when a company wants to divest itself of divisions that have become non-core.

Broadly, divestitures may follow one of three alternative processes:

One-to-one negotiation can be appropriate when there are just one or two potential buyers. It is easy to maintain confidentiality, and negotiations may get a quick result. But the buyer can get an advantage in negotiations, and the seller can be uncertain about maximising value.

A wide or open auction is more often used by an owner without involving a specialist advisor. The owner announces to the press that a business is "non-core" or even "for sale" and simply waits for approaches. Clearly in this case confidentiality is unimportant, and while it theoretically maximises value, in practice there is a serious risk of damage to the business through rumours and staff and management disaffection.

In most cases the targeted auction approach is much more effective. Confidentiality will be maintained, and proper search techniques on the part of the advisor should ensure that all the likely bidders are contacted. Targeted auction is also the most effective in maintaining competitive tension because targets are led through the bidding process.

The skills deployed by an advisor in a divestiture include:

The chart below explains that process:

The production of the information memorandum, target list of potential purchasers, and vendor due diligence are carried out simultaneously in the preparation phase.

In the marketing phase, potential purchasers are approached, initially with an anonymous "teaser," then provided with the information memorandum and process letter after agreeing to the terms of a confidentiality undertaking.  The process letter sets out the terms and timing of the process, usually calling for non-binding bids in a fairly short timeframe.

These steps lead to the closing phase, with either a selected preferred bidder, or, under some circumstances in a competitive process where the competing acquirers are provided with a draft sale and purchase agreement (SPA), the first to agree acceptable terms winning the target. During this phase, the advisor will also manage the due diligence process, usually through an on-line Electronic Data Room.

In either case, the parties agree the terms of the binding offer and sign the SPA, completing the transaction.


About the author

Andrew Baird, founder of Baird Partners, has been active in Mergers and Acquisitions since 1988. Prior to this he worked for several international banks in London and other European capitals.

Andrew specialises in transactions involving plastics, IT software and hardware, electronics, banking and financial services, facilities management, and industrial services. He is a founder member of the London Chapter of ACG, a Fellow of the Institute of Directors, and a Fellow of the Royal Society. He is also a Chairman of East Surrey College, and a governor of Oakwood School.

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