Divestitures present unique challenges that make it difficult for companies to realize full value potential. Even companies with established competency in M&A transactions can struggle to optimize value.
A report from PwC's Deals Divestiture practice identifies three primary sources of divestiture deal value.
Transaction proceeds
Transaction proceeds are generated from the sale of the divested business (less investment banking, legal, and advisor disbursements). These proceeds are typically the most obvious source of value that companies look to in effort to maximize deal value.
Transition costs
An understanding of transition costs can enhance a company's negotiating position and serve to avoid unexpected transaction costs. There are three types of transition costs in divestiture transactions: separation costs, transition services agreement costs, and stranded costs.
- Separation costs are those incurred by extricating a divested business from its parent company's infrastructure. Examples of these costs include costs associated with implementing a standalone enterprise resource planning system for the divested company, and costs associated with carving out and migrating data specific to a business being sold.
- Costs associated with implementing a transition services agreement are incurred by providing support to the divested company on a temporary basis. Examples include the provision of information technology support, finance and accounting back office support, and operational support. A previous post on this blog discussed transition services agreement costs in more detail.
- Stranded costs are costs that were previously absorbed by the divested business but remain with the parent company following separation. Examples of circumstances that lead to stranded costs include shared services centers, shared infrastructure, and long-term vendor contracts that support multiple business units.
In order to maximize deal value, a divesting company must implement a structured and systematic plan that identifies transition costs early in the process. Effective transition cost management facilitates informed decision making and negotiations throughout a divestiture's transaction process.
Parent/seller optimization
Value realized from parent/seller optimization is generated from external and internal impacts of the divestiture. Examples include value generated from post-deal contractual relationships, competitive and geographic ramifications, and customer impacts with respect to retention.
Companies typically focus on transaction proceeds and parent/seller optimization since these factors account for the majority of a transaction's value and are usually easy to identify. Transition costs, on the other hand, pose the greatest challenge as they are difficult to identify and require the divesting company to evaluate its processes and policies objectively. Nevertheless, transition costs can be significant and cannot be overlooked if a company is to successfully maximize divestiture deal value.
The author would like to thank Robyn McLaren, articling student, for her assistance in preparing this legal update.
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