A Divestiture Strategy That Delivers Success For Your Business

However, there are many reasons why companies engage in divestitures, and not all of them have a positive impact on the company. Employees constitute one of the largest operating expenses of a company. The HR function plays a pivotal role in helping to drive the transformation that comes from confidently divesting the right assets at the right time in order to secure value. The ability for HR to accelerate closing, manage costs and secure employee retention hinges on close collaboration with the finance, tax, legal, IT and corporate development departments.

A divestiture is when a company or government disposes of all or some of its assets by selling, exchanging, closing them down, or through bankruptcy. Some religious organizations have also viewed divestment as a moral obligation. In 2014 the General Assembly voted in favour of divesting from three major U.S. corporations that conducted business in Israel. Some firms are using technology to facilitate the process of divesting some divisions.

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IT is the most complex area for many divestitures and its success is critical to getting the deal done. IT enables the business and functions end-to-end across the value chain of most organizations. At PwC we have built a world-class global team of IT divestiture professionals who have created the strategy and executed some of the largest and most complex divestitures. Our teams have both industry and IT domain expertise in applications, infrastructure, org/op model, cyber, cloud, and much more. They focus not only on closing the deal with minimal business disruption, but also enhancing value for both the Seller and the Buyer. We have pre-defined future state IT architectures which help enable cost-reduction, minimize one-time cost, expedite transaction close, reduce TSA’s, and enhance deal value.

Most people think of the buy-side of these transactions but corporations also actively look to sell non-performing or non-core assets to optimize their business. For example, in 2020, General Electric Corporation announced the completion of the divesture of its BioPharma division in which GE received approximately $20 billion in cash. According to the press release, the GE chair and CEO H. Lawrence Culp Jr. stated that the sale helped to “de-risk our balance sheet and continue to solidify our financial position.” Reasons why companies divest part of their business include bankruptcy, restructuring, to raise cash, or reduce debt. In finance, divestiture is the process of disposing of an asset through a sale, exchange, or closure. Divestment is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. Thomson Reuters, a multinational media and information company, based in Canada, sold its Intellectual Property and Science division in July 2016.

Important Financial Ratios To Know When Analyzing A Stock

Leveraging a transaction for transformation isn’t easy, and sellers who fail to adequately prepare before a divestiture face even longer odds of realizing value. Success depends on being a prepared seller — not only for a particular deal but for strategic divestitures as a whole.

• Our research shows that, overall, divestitures that saw higher returns, share three key factors.
• These costs can include expenses related to separating the business, including redirecting IT systems as well as stranded costs.
• The primary reason for selling NXP was a high volatility and unpredictability of earnings for the chip business, which was hurting Philips’ stock value.
• You will need to agree with the buyer on an exit plan that includes a centralized way to update executives on progress – a process that could also present opportunities to exit the TSA early.
• The planned reforms include the restructuring and divestiture of public enterprises.
• The U.S. government determined AT&T controlled too large a portion of the nation’s telephone service and brought antitrust charges against the company in 1974.

We are always looking at different strategic alternatives with respect to our assets, including acquisitions, sale or divestitures. Examples include disinvestment from South Africa in the former era of apartheid , Disinvestment from Israel and more recent calls for fossil fuel divestment in response to climate change. Positive returns are possible for companies that look across their portfolios of businesses and carefully assess how and where a divestiture can deliver value. By acting instead of reacting, a divesting company can chart a clearer course for transformation.

Insights On Trends And Recurring Matters Regarding Us Tax Topics In M&a Transactions

In one important case, divestiture was initiated by the U.S. government. By the middle of the 1970s, AT&T controlled almost all telephone service in the country through its ownership of the Bell System monopoly. Constantly reviewing a company’s portfolio of assets and optimizing it for the best performance is an important part of corporate strategy.

Sanctions, selective purchasing, and disinvestment are additional actions that can be used along with divestment to bring about political, economic, and social reforms in a targeted country. Another strategy, constructive engagement, is the continuation of economic activity between a corporation or government and a targeted country. Often those who oppose divestment support constructive engagement as a viable alternative, maintaining that the ongoing economic relationship will bring about dialogue or pressure for change in the targeted country.

What Are The Reasons Divestitures Occur?

Such tax assets can drive a seller’s ability to create additional deal value by conveying such assets to the buyer or by using them to enhance the amount of after-tax cash flows realized in the sale. A partial or full disposal can happen, depending on the reason why management opted to sell or liquidate its business’ resources.

But divestitures are easier in theory than practice, and many companies don’t achieve the anticipated value from the transaction. Preparing auditable carve-out information of the business being divested is oftentimes one of the most complex and lengthy workstreams in a deal. Carve-out financial statements are usually required for regulatory purposes and/or financing, and stakeholders will often want to bridge this information to the deal financials. Carving out entangled businesses from disaggregated data sources adds to the complexity — PwC has proprietary technology to automate this process and help reduce execution risk.

Conglomerates: Cash Cows Or Corporate Chaos?

Arguments supporting divestment that affects a company or country generally are based on either a positive assumption of rationality or a negative assumption that economic force is the only means for change. Both arguments assume a long time line and the necessity for cooperative effort by the divesting institutions. Reasons for divestment at the institutional level may be political, legal, financial, or ethical in nature. A company may respond to shareholder or consumer pressures and close down its operations in a country with a poor human rights record, doing so for financial and ethical reasons. Then another country’s government may ban investment, whether public or private, in that country. In this way, investment and divestment can be seen as either ethical or unethical, based on moral foundations. Asset by a company or government entity through sale, exchange, closure, or bankruptcy.

For sellers who saw accelerated EBITDA post-divestiture, the median transaction price was nearly double the price for sellers that didn’t see faster EBITDA growth. Divestitures create value for companies in times of economic uncertainty as well, our analysis found. Those that divested in previous recessions were able to focus on their core businesses and boost cash flow following the sales, especially companies that were under earnings or cash flow pressure. In one instance, those with less than 10% EBITDA growth, including those with negative growth, two years before the divestiture saw relative returns of 8% in the year after the sale.

Divestiture And Separation

PwC refers to the US member firm, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. A company will divest a particular unit when it’s obsolete or no longer a beneficial part of a company. If you’re in the printer business but you also sell ink, you may decide that it’s more strategic to focus on just printers. You might sell the ink division to another company – perhaps one that only sells ink. Or you may shrink the ink division if your revenue from ink is exceeded by the cost of maintaining the ink department.

Our teams deliver straightforward advice and execution support to help you make the right portfolio decisions to secure your future. Planning and executing a successful divestiture is far more challenging than most executives expect. When divesting a business, time is often short, structures are complex, unexpected stress and consequences arise and there is a high risk of value leakage. We bring key insights to help you make confident decisions to unlock, protect and enhance value. Divestiture often follows after a merger or acquisition when redundancies occur or the new owners feel like an asset doesn’t meet the new company’s strategic goals.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Divestitures can come about in many different forms, including the sale of a business unit to improve financial performance and due to an antitrust violation. Total M&A Solution™ Throughout the mergers and acquisitions (M&A) transaction life cycle, we provide cognitive enablers and accelerators to bring the power of automation, analytics, and machine learning. Perspectives Serial and parallel divestitures Divestiture activity specifically is at record levels. Unique to this current wave of divestitures is the number of companies executing multiple divestitures in rapid succession or at the same time.

You will need to agree with the buyer on an exit plan that includes a centralized way to update executives on progress – a process that could also present opportunities to exit the TSA early. Moreover, treating the TSA’s end date with as much rigor as the divestiture’s close date will be critical to retain the deal’s expected value. While choosing the right asset to sell is a clear first step, most companies lose value as they begin to take action. This involves balancing the management of retained and divested businesses, especially as it relates to talent.

Section 208 never requires divestiture, only nonparticipation in the particular matter. Bankrate has highlighted some of the best mutual funds based on Morningstar research. Consider these top brokers if you’re looking to invest in mutual funds. AT&T was allowed to hold onto its telephonic equipment company, Western Electric, but it was eventually forced to divest of that as well when it proved less profitable in the wake of the settlement. The Structured Query Language comprises several different data types that allow it to store different types of information… Excel Shortcuts PC Mac List of Excel Shortcuts Excel shortcuts – It may seem slower at first if you’re used to the mouse, but it’s worth the investment to take the time and…

In December, Facebook also became the target of a federal U.S. antitrust suit that could potentially lead to its divestiture of WhatsApp and Instagram. The Office of Government Ethics approves all certificates of divestiture, and Partenheimer said that the office asked for additional information and took several weeks before approving the request on Oct. 9, 2020. Rationalization is a reorganization of a company in order to increase its efficiency. Rationalization may also refer to the process of becoming calculable. Charlene Rhinehart is an expert in accounting, banking, investing, real estate, and personal finance. She is a CPA, CFE, Chair of the Illinois CPA Society Individual Tax Committee, and was recognized as one of Practice Ignition’s Top 50 women in accounting. Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.