Going, Going, Gone: A Quicker Way To Divest Assets

Going, going, gone: A quicker wayto divest assetsSpeedy separations create more value than those that lumber along, our research finds.Preparation is the key.Obi Ezekoye and Jannick Thomsen Jenner Images/Getty ImagesAUGUST 2018 CORPORATE FINANCE

The decision to divest assets can be a drawn-out one,as companies cite sunk costs, existing capitalstructures, fear of shrinking, and overly optimisticprojections as reasons to hold on just a little bitlonger. But when it comes to separations, speedmatters—not just in the initial decision to divest butalso in how quickly the divestiture process is executed.McKinseyon Finance2018Delays in executioncan be 67a signthat managementGoing,going,gone:Aquickerwayconsideredto divestteams have not carefully and objectivelyExhibit1 oforganizational,2operational,and other tacticalfactors associated with the divestiture. Worse, longdeal timelines can suggest the loss of critical talent,Exhibit 1Urgency matters when it comesto separations.Parent company’s average excess total returnsto shareholders,1 %25.813–24 monthsbetween announcementand separation date8–12 monthsbetween announcementand separation date–10.81 Excess total returns to shareholders a year after separation,benchmarked to the S&P 500 industry-specific index.Research base is 100 large transactions over the past 25 years(Jan 1, 1992, to Dec 31, 2017).2 Parent companies involved in a major divestiture( 500 million), n 130.Source: S&P Capital IQ, McKinsey analysis2McKinsey on Finance Number 67, August 2018struggles with internal politics, and even keystakeholders’ questioning of the strategic rationalefor the deal. And make no mistake, the longer ittakes to separate, the more anxious employees,customers, and investors in the market can get.We evaluated all major divestitures1 between1992 and 2017 and examined the excess total returnsto shareholders (TRS) one to five years after theassetsseparations. Our research showed that, on average,separations completed within 12 months ofannouncement delivered higher excess TRS thanthose that took longer (Exhibit 1).Divestiture teams in these companies acted withspeed and confidence—and were more likely to findthemselves among the 29 percent of companies inour research base that experienced win–win scenariosin which both the parent company and the divestedbusiness achieved TRS in excess of their peers severalyears after the separation was complete (Exhibit 2).What can we learn from these win–win divestiturestrategies? Obviously, each deal is different andhas unique characteristics, but the general trendsuggests that speed matters. We surmise thatthe successful divestors in our research base actually“moved slow to move fast”—that is, they carefullythought through the range of strategic and operational considerations before making the publicannouncement. When it came time to execute, seniorleaders in these companies adopted a careful,systematic process for assessing exactly what andwhen to divest as well as how to manage the taskmost efficiently.Toward faster separationsIn our work with companies across multiple industries that have sold, spun off, or otherwise separatednoncore assets from their organizations, we haveseen successful divestors routinely make fourtactical moves to execute faster. They establish adedicated divestiture team that has the skills

McKinsey on Finance 67 2018Going, going, gone: A quicker way to divest assetsExhibit 2 of 2Exhibit 2Performance varies widely between parent and divested companies several yearsafter separation.Excess total returns to shareholders 2 years after separation,1 arent company1 Annualized excess total returns to shareholders (n 298). Scatter plot excludes outliers with performance below –100% or above 100% excesstotal returns to shareholders. Benchmarked to the S&P 500 Sector Index; tracks performance of all spin-offs 500 million from 1992 to 2017.necessary to ensure efficient management of thedeal. They structure incentives so that leadersof the parent company and the soon-to-be-divestedcompany are encouraged to act in the bestinterests of the departing business. They activelyanticipate the complexities associated withdisentangling the divested business from the parentcompany. And they use transition-servicesagreements (TSAs) sparingly to prevent eitherside from hanging on too long.Going, going, gone: A quicker way to divest assetsDedicated team that efficiently manages dealsto completionEven if a company has extensive experience inmanaging mergers, it might not be able to executeseparations efficiently, thereby slowing downdeals. The skills required in divestitures are differentenough from those used in M&A that even themost sophisticated acquirers often have difficultycontending with complex separation issues whilealso leading rigorous transaction processes.3

Even if a company has extensive experience in managingmergers, it might not be able to execute separationsefficiently, thereby slowing down deals.To work more efficiently, the successful divestors wehave observed establish a dedicated divestitureteam staffed with leaders who have experience inmanaging such transactions and a clear mandateto run the entire planning, preparation, deal-making,and execution process. One technology companyhas an “A team” dedicated to managing all the processsteps associated with divestitures (big and small).The best candidates for this dedicated team tend tohave a general-management background, a keenview of investor expectations, and a clear understanding of the true sources of value for the parentcompany and the divested company. Senior leadershipgives this team time and space away from their“day jobs” and the rest of the organization to ensurethat separations are being managed from end toend. By building such a team in-house (and providingregular opportunities for others to cycle through it),the technology company has built lasting capabilitiesin M&A and divestitures and improved the oddsthat it can quickly close deals in the future.Shared incentives for managers in both the parentand divested companiesManagers in a divested business unit mightfind themselves veering from the parent company’sobjectives once they receive indication that thebusiness unit or asset they have been leading hasbeen earmarked for separation. They might,understandably, feel compelled to focus on ensuringthat they do all the right things to protect theirfuture in the separate business rather than reflexivelymanaging to the parent company’s goals—actionsthat can get in the way of efficient executionof a separation.4McKinsey on Finance Number 67, August 2018For their part, senior leaders in the parent companymight adopt an “out of sight, out of mind” mentalityonce a decision to divest has been made. This isa mistake. The parent company owns the separatedcompany until it doesn’t; therefore, the parentcompany must continue to make all the criticaldecisions associated with the divested business unit.Senior leaders in the parent company need to putincentives in place to ensure that all activities at thedivested company reflect the parent company’sobjectives. For instance, the technology companywe noted earlier aligned the incentives of themanagers of the departing business unit to the characteristics of the sale. It did so not only to ensurethat each step in the separation would be expertlymanaged but also to send the right signals aboutthe deal to buyers and investors.Test-and-learn approach that avoids delaysfrom restructuringToo often, senior leaders focus solely on criticalissues relating to financial and legal issuesassociated with separations and miss the equallyimportant managerial and operational implicationsof a divestiture. The successful divestors in ourresearch balance both. They know financial andlegal aspects are central from an investmentstandpoint—but not the only thing of value. That iswhy they put much of their focus up front on theoperational complexities of disentangling. Seniorleaders in the technology company we citedearlier applied a dispassionate, Socratic changemanagement approach to determining howbest to “rewire” complex business functions,physical assets, and reporting lines in the

least amount of time in the wake of separation.Which roles, contracts, data, and processesshould be shifted or otherwise changed in the wakeof separation? And how long will various transitionstake? The dedicated divestiture team consideredthese critical questions ahead of any public announcement or other investor communications.number of TSAs used, build time limits into them,and structure them to reward mutually beneficial behaviors.Thus far, we have emphasized tactical elements ofsuccessful divestures. But these factors shouldnot overshadow the need to think strategically andtake an unbiased view when making initialdivestiture decisions—for instance, objectivelyconsidering whether the company is still thebest owner of certain assets, exploring multipletransaction types instead of just the mostobvious, or using the separation as an opportunityto transform operations. Additionally, executivesshould be mindful that even in well-managedseparations, there may be setbacks (market shifts orother industry factors, for instance) that promptthem to slow down.Successful divestors know they will need to set upnew governance structures for the departingbusiness unit while simultaneously enacting processchanges internally. They put an emphasis onensuring that these systems are airtight before dayone. Otherwise, they might end up with errors ordelays in critical transactions, stranded costs, andmissed opportunities to create more value forthe company. The divestiture team at one companyput the most critical processes in a divestedbusiness unit through a series of pressure tests.For instance, as part of an internal test, it ranthrough a full order-to-cash process, asking howcustomer orders were documented, filled,invoiced, and paid for under a range of scenarios.The team was careful to test critical processesin both optimal and less-than-optimal conditions toensure that the order-to-cash process and otherstandard operations at the departing business unitwould be ready for day one.Limited use of transition-services agreementsAfter a deal has been closed, companies often rely onTSAs to ensure that operations are not interrupted.These agreements are exactly what they sound like—pacts in which the parent company agrees to provide infrastructure support, such as accounting, IT,and HR services, after the transaction closes. Insome instances, we have seen parent companies usethe TSA as a release valve to temporarily avoidaddressing stranded costs. In other instances, wehave seen managers of divested business unitsuse the TSA as an excuse not to build self-sufficientbusiness functions. Our experience suggeststhat such agreements should be used as a tool, nota crutch. Companies should minimize theGoing, going, gone: A quicker way to divest assetsAsset sales, splits, carve-outs, and spin-offs are onthe rise globally—partly in response to activistshareholders and partly to appease value-mindedboards of directors. Companies that make suchtransactions a critical part of their resourceallocation and portfolio-management strategieshave much to gain. But creating value throughdivestitures isn’t automatic. Significant planningand investment by senior leaders are required, as is acommitment to speed and execution.1We defined “major divestitures” as deals valued at more than 500 million.Obi Ezekoye (Obi Ezekoye@McKinsey.com) is a partnerin McKinsey’s Minneapolis office, and JannickThomsen (Jannick Thomsen@McKinsey.com) is apartner in the New York office.The authors wish to thank Anthony Luu, Jacob Marcus,and Tim Wywoda for their contributions to this article.Copyright 2018 McKinsey & Company.All rights reserved.5

Speedy separations create more value than those that lumber along, our research finds. Preparation is the key. Going, going, gone: A quicker way . also in how quickly the divestiture process is executed. . going, gone: A quicker way to divest assets Exhibit 1 of 2 Urgency matters when it comes to separations. aen coanys aeae ecess oa ens o .