Spinning out: How and why companies divest

Divestiture is typically when a large corporation disposes of a non-core asset, whether for financial or strategy reasons, says Brian McCloskey, partner, corporate mergers and acquisitions (M&A), Matheson. “The process of what a company determines its non-core is typically based on potentially a change in management, or a change in shareholder, or increasingly, shareholder activists that are looking to extract as much value from the asset as is possible. This results in a large corporate disposing of what an activist or a strategic review management might deem to be non-core to the growth of the business.”

Jan Fitzell, partner, M&A, Deloitte, says there are a number of terms for divestiture. “You could see ‘spin out’, or ‘disposal of a non-core division’ as all being the same thing. It’s a company selling a piece of itself that it doesn’t deem core anymore.”

Companies usually decide to dispose of a non-core asset of the business following a review of performance. “You’ll find companies will do a strategic review, analyse their businesses, see which ones are growing, what there are better prospects for, and selling off parts of themselves that they can see someone else can drive that business better than they can,” says Fitzell. Essentially, they are “selling off parts of the business that they find a better home for”.

Acquirer

Often, businesses that do divest are major corporations with multiple businesses, and divesting can streamline the business. Fitzell says that if there are a number of different businesses growing at different rates, with one growing much faster than the other, the company might sell the slower-growing one knowing the new acquirer will take the company that’s divested and operate it better.

McCloskey says that sometimes divestiture occurs as part of the buying of a business also, such as when a company decides to divest non-core parts of the acquired business. “As part of a global M&A deal, a company might acquire a business with a number of different lines attached to it and the particular elements of the business that it acquires that the initial buyer might see as non-core, will quickly be disposed of in the process of that sale.”

Other scenarios where divestiture might occur is when businesses are readying themselves for a sale and know that a non-core part of the business would not be of interest to the acquirer. Fitzell says, “Sometimes, there are companies that are thinking of selling in the future, with a number of different arms to the business. They know that all three arms wouldn’t be attractive to an acquirer, but maybe two would be, so they’ll sell the third one to another company to make the transaction a little cleaner.”

Pros and cons

While the pros to divesting a non-core part of a business might be obvious, such as freeing up capital and refocusing attention on higher-performing areas of the business, there are sometimes cons to divesting. McCloskey says, “From a purchaser’s perspective, what you can sometimes find with these type of divestiture transactions is that – particularly where the buyer is a non-corporate, so potentially, a private equity buyer acquiring a non-core asset from a listed or large private company – there is an obligation, as part of the transaction, that the seller will provide certain transitional services to the target business.”

From a seller’s perspective, providing these services can sometimes, in the period after the deal is done, be seen as a distraction for management from the underlying aim in selling the non-core asset, which is to focus on the strategic priorities of the businesses. However, he says, “As time goes on, the acquired business will stand up on its own two feet more and allow itself to get the support functions through organic hiring or outsourcing and have less reliance on the selling entity.”