Mavengigs

Mavengigs is a global consulting firm providing consulting services for Mergers & Integrations (M&A) and Transformations. Through our network of independent resources and partners, we serve clients in USA and Europe. Mavengigs is a division of Panvisage Inc. (a holding company with interests in consulting, education, real estate and investments).

This content is a synopsis from multiple sources for easy reference for educational purposes only. We encourage everyone to become familiar with this content, and then reach out to us for project opportunities.

Sell Side Process

M&A Sell Side Process refers to selling an entire business, or part of a business. Post-deal divestiture includes separating systems, people, process, and contracts.

Divestiture

Divestiture encompasses the strategic disposal of a company’s assets (partial or complete), or just a particular business unit (along with associated assets), through sale, exchange, closure, or even bankruptcy, to unlock value, and enhance a firm’s market value for shareholders. Based on deal specifics, it could be called divestment, de-merger, separation, carve-out, sell-off, spin-off, split-up, carve-out, or just liquidation

Divestiture is a strategic tool that enables companies to navigate shifting market dynamics and maintain competitiveness by shedding underperforming units or non-core assets, thereby rejuvenating their financial health, bolster performance, and fuel growth.

As companies expand, they may find themselves entangled in numerous business lines, making divestiture a means to refocus and sustain profitability. By divesting, companies can trim expenses, settle debts, concentrate on core operations, and boost shareholder value. In some cases, divested business units may evolve into independent entities. Additionally, divestment may be obligatory as part of merger or acquisition agreements, or to comply with regulatory mandates, while governments may resort to privatization to alleviate debt burdens or stimulate private sector participation.

Reasons for Divestiture

There are many different reasons why a company may decide to sell off or divest itself of some of its assets. Here are some of the most common ones:

• Shift in corporate priorities due to evolving business practices.
• Focus on expanding core focus by acquiring additional core capabilities and product offerings.
• Divest non-core assets
• Eliminate underperforming business units
• Improve company financial health (inject liquidity, reduce debt load, increase free cash flow, resulting in higher profitability and valuation)
• Setup a different control structure and reduce bureaucracy.
• Pressure from activist shareholders
• Offers from Private Equity firms that prefer carve-outs and pay higher deal multiples

Types of Divestiture

• Sell-Off: In a sell-off, the parent exchanges the divested assets to an interested buyer (another company) in return for cash proceeds.
• Spin-Offs: The parent company sells a specific division, i.e., the subsidiary, which creates a new entity that operates as a separate unit where existing shareholders are given shares in the new company.
• Split-Ups: A new business entity is created with many similarities as a spin-off, but the distinction lies in the distribution of shares, as existing shareholders have the option to either keep shares in the parent, or the newly created entity.
• Carve-Out: A partial divestiture, carve-outs refer to when the parent company sells off a piece of the core operations through an initial public offering (IPO) and a new pool of shareholders is established – further, the parent company and the subsidiary are legally two separate entities, but the parent will typically still retain some equity in the subsidiary.
• Liquidation: In a forced liquidation, the assets are sold in pieces, most often as part of a Court ruling in a bankruptcy proceeding.

Business Considerations

There are several business considerations during divestiture, and deal teams need to factor in these during divestiture planning and execution. Generally, Seller could be called RemainCo and Buyer could be called CarveCo.

• Managing Transition Service Agreements (TSA) and stranded costs is a critical aspect of a successful carve-out strategy. TSAs are contractual agreements that specify the services and support that the seller (RemainCo) will provide to the buyer (CarveCo) for a defined period after the divestiture.
• Integration Planning: Early in the carve-out process, identify all the services and support that will be needed from RemainCo by CarveCo post-divestiture. This includes IT services, HR support, facilities, and any other shared services.
• Negotiate Clear TSAs: Negotiate TSAs that clearly define the scope, duration, and cost of services. Ensure that both parties have a shared understanding of the expectations and service levels during this transition period.
• Cost Allocation: Determine how the costs of TSAs will be allocated between CarveCo and RemainCo. This should be based on a fair and transparent method, considering factors like actual usage and benefit to each entity.
• Stranded Costs Mitigation: Stranded costs refer to the ongoing expenses incurred by RemainCo that were previously shared with the divested operation. Develop a plan to minimize these costs over time, which may include reducing excess capacity, renegotiating contracts, or finding alternative cost-saving measures.