When Should a Business Not Be Divested

When Should a Business Not Be Divested

It is common for employees in these roles to question management`s decision to move their jobs to the new entity, and some may choose to go elsewhere for new jobs. To influence these decisions, management may offer compensation, professional development opportunities and other incentives such as residency bonuses. Management must also address the issue of deferred compensation for individuals moving to the new entity. These measures can also reassure the buyer that talent will remain strong and facilitate a smooth transition. The parent company`s board of directors should ensure that executives are able to communicate the reasons for talent decisions. Divestment is the act of a company selling an asset. Although disposal may refer to the sale of an asset, it is most often used in connection with the sale of a non-core business unit. The sale can be considered the direct opposite of an acquisition. Assemble a team that regularly reviews your company`s activities for divestiture candidates and considers issues such as timing. Let the team build relationships with investment banks that potential buyers often know outside of sellers` primary markets. Example: As someone familiar with your company`s immediate environment and prospects, you should have a better grasp of value than most foreigners, and if they offer a price well above its intrinsic value, it`s time to consider divestment. «Many companies pride themselves on their ability to drive inorganic growth through acquisitions.

It`s much rarer to find a company that prides itself on how it sells a business or asset. If a company has identified a company or department that does not align with its overall strategy or that could be looking for new opportunities as a separate entity, this raises important questions for the board. In 2020, WeWork Corporation, which offers office space for rent, was experiencing financial difficulties. As a result, the management team announced the divestiture of its non-core business, including content and software marketing activities. Companies can divest businesses that are not part of their core business so that they can focus on their core business. In 1989, Union Carbide, a well-known producer of industrial chemicals and plastics, decided to divest itself of its non-essential consumer group business to focus more on its core business. Drawing these boundaries is often not easy. Traditional companies are often deeply rooted in the parent company, and asset ownership unbundling can become very sensitive very quickly. In some situations, effective divestitures also require maintaining close ties with the seller.

Bell Canada`s recent spin-off from its small regional carriers and the rural portions of DSL (its residential fixed business) is a case in point, given increasing competition from cable companies. At Textron, for example, executive compensation for divested entities generally consists of three components. A closing bonus is paid to senior executives to encourage them to successfully complete the transaction. Key executives receive retention programs to ensure they remain in place until the transaction closes. And severance pay reduces the fear of the unknown for all employees. Severance benefits typically guarantee compensation for one year after a sale closes, but can extend beyond that period. Finally, Textron prohibits its own organization from poaching talent from companies being sold. For some divestitures, a transition service agreement (TSA) requires the vendor of a business to provide certain services and support for a period of time after the transaction closes. In finance, the sale or disposal is defined as the sale of an asset by sale, barter or closure. Divestment is an important way to create value for companies in the merger, acquisition and consolidation process. For example, a merger can result in redundant operations and businesses.

Divestitures allow the company to improve operational efficiency and reduce costs. However, there are many reasons why companies engage in divestments, and not all of them have a positive impact on the business. The way to prevent investors from receiving inaccurate signals about a company`s current state and future prospects is to maintain open communication with shareholders about important company decisions, such as the decision to dive. In such a case, it is in the interest of the company to clearly communicate to the shareholders the reasons for the decision to divest and information on the benefits that the company intends to derive from the sale of a business. Also consider the impact of a divestment on the original business, which is the groups that support the business. Significant divestitures can result in the remaining company needing more staff than necessary in areas such as human resources, legal, IT, compliance, and others. The board should discuss with management the need to restructure the company to stop paying for services that are no longer needed. Divestments can take two main forms. Many companies choose to sell directly, either to strategic buyers or to private investors or other financial buyers.

An example of the former is Ford`s recent sale of its Land Rover and Jaguar premium car ranges to India`s Tata Motors; These included The Home Depot`s sale of HD Supply in 2007 to a team of private equity firms for $8.5 billion and Weyerhaeuser`s sale of Canada`s wholesale building products distribution centres to Platinum Equity the same year. In other circumstances, a divestiture will separate from the target as a separate entity with its own shares, as Altria did with its controlling interest in Kraft Foods. Each approach has benefits and costs, and the best sellers think about how to structure the deal and who they will sell to, just as carefully as which units to sell and when. The box «Charging for separation» summarizes the trade-offs associated with these decisions. When financial software company Intuit decided to focus its organization on its core business, it faced the daunting challenge of selling three business units. The company wanted to execute these divestitures simultaneously to minimize ongoing obligations and distractions for employees and remaining operations. The underlying principle is simple, says CFO Ted French: «First, maximize the value of the company, even if it means separating talented executives from Textron. People are treated fairly and rewarded for their contributions. As a result, people really don`t mind being sold by us.

There are very few other companies that can make this claim. Companies that divest part of their business may do so by selling a subsidiary or separate business that operates under the parent company.

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