The reason the seller may want to exit the business is that performance is suffering as a normal course of business value erosion potentially due to lack of investment from the RemainCo given its total portfolio prioritization. But underperformance might also be caused by management being distracted by the transaction and not giving full attention to running the business during the transition period. In either scenario, it is essential to meet forecasts for the business, especially if the asset’s performance is material for the seller and must be disclosed to the investors.
Overall, making short-term, focused and high ROI improvements to support the value story before the sale process begins and clearly demonstrating this to the buyer pool will help make the asset more compelling.
4. Designate a leader to focus on governing the separation
While any decision will require teamwork, it comes down to one lead executive to manage this essential process to create value for RemainCo and DivestCo. The executive will have to make some tough calls, manage employee morale and keep the performance on pace through what can be a tedious process. It is ideal to separate the roles of the business operator from the executive sponsor who will plan and implement the carve-out and separation process. EY professionals have seen two types of executive profiles in divestitures:
- A seasoned executive uses this experience as a way to make his or her mark and build a legacy
- An up-and-comer uses this divestiture as a springboard to roles with bigger scale and scope
In either case, the appointed executive should embrace this challenge for one to two years.
Put somebody in charge of running the divested business as a separate business if it isn’t operating that way already. Get clarity into what operations will be separated and how assets and employees will be aligned in both the divestiture and the remaining company. Decide who should go with the divested company and who should stay with the parent. This will involve several questions for senior management, including how to retain the management team through the divestment process, how a potential buyer will react to the management team and whether that buyer will instead want to bring in its own team.
But not only leaders will feel the uncertainty. Key talent may also opt to seek new opportunities if they feel the new culture does not align to their personal values. It is critical that the sellers identify key talent and make sure they know what to expect throughout the process. Take steps to retain key employees by explaining “what’s in it for you” so that they will still be around to add value when the unit is divested.
5. It isn’t over until TSAs are exited and stranded costs are eliminated
The signing or even the closing of the transaction does not end the value-creation process for the seller. Numerous transition services agreements (TSAs) put in place during the negotiation process will almost always outlast the close date of the deal by months to years.
The deal management team governing the separation process should not lose sight of managing the TSAs when the buyer exits them. There will be stranded costs across all functions that the seller needs to endure while providing these transitional services over the course of the agreed-upon period. A TSA wind-down process has to be established early on with a clear action plan to pull the proper levers for cost take-out tied to the exit timing. In the 2018 Corporate Divestment study, 67% of life sciences executives said they wished they had used analytics in the identification of stranded costs. Starting separation planning earlier and utilizing analytics helps to identify areas of entanglement and understand the magnitude of stranded costs, potentially avoiding delays in closing.