How to Prepare for Prospective Divestitures

In January, Deloitte held a webcast for merger and acquisition (M&A) professionals, and the polls it conducted during the event provide some interesting data points. Among the 520 respondents, nearly half (47.9%) said their company is looking to execute a divestiture in 2023. Fifty-four percent of those said they plan to sell a business unit or company to another organization. Fourteen percent expect to spin off a business unit, and another 14 percent expect to perform an equity carveout—a partial sale via initial public offering (IPO).

Treasury & Risk sat down with Brenda Ciampolillo, a managing director in M&A for Deloitte Risk & Financial Advisory, to find out whether the poll results reflect what her team is seeing play out within client organizations—and what treasury and finance professionals should be doing today to prepare for the divestitures they may be supporting in the near future.

Treasury & Risk:  Thanks for taking the time to speak with us! Do you have historical information to compare with these webcast polls? Is the frequency of divestitures increasing?

Brenda Ciampolillo:  Over the past two or three years, especially with the Covid-19 pandemic, we saw a wide range of divestitures. IPOs, spin-offs, lots of different types of transactions. But now—given where the economy is, and consistent with the responses we heard from poll participants—companies have shifted more toward selling off their non-core assets versus looking at equity transactions or IPOs or spin-offs.

T&R:  It looks like the largest proportion of respondents to your polls—24.2 percent—said their planned divestiture will be driven by a need to divest non-core assets. Another 20 percent said they need to raise cash to support future operations. Does that gibe with what Deloitte is seeing in the real world?

BC:  Yes, it definitely matches what we’re seeing. The economy is level-setting for certain industries, and a lot of businesses are responding in different ways. Some are reorganizing internally, from a people perspective, or finding other ways to reduce costs. Others are looking at selling some of their non-core assets in the market to raise cash. Selling off non-core assets enables the business to concentrate more heavily, from a strategy perspective, on whatever its core assets are.

T&R:  And is the need to raise cash something that is pretty top-of-mind right now for executives because credit is becoming less available?

BC:  That’s a fair comment. It’s not as easy to tap the markets as it was previously.

Coming out of Covid, some companies had upticks in their business. We saw a level-setting of the playing field. And people are now concerned about making sure they’re concentrating on the right things from a strategy perspective. They’re thinking about future cash flow and the cash needs of the business, because companies are experiencing a lot of uncertainty about what’s going on with the markets.

T&R:  What are corporate treasury teams currently doing to support these types of decisions?

BC:  That’s a good question. In a lot of these companies where the parent is considering divesting a subsidiary, the corporate-level C-suite may not have great insight into the true cash needs of the component of the business that they’re trying to sell. So, as the company is getting ready to sell assets, it becomes apparent that it will either need to hire advisers or dig in and determine how much cash that particular component of the business has been burning. That may not be easy to identify.

What treasury needs to do is figure out whether the company has full visibility into cash flows, so that when management starts looking at a divestiture, they aren’t surprised to realize they don’t have the level of visibility they thought they had.

T&R:  And then 19.8 percent of your survey respondents said their planned divestiture will be driven by a need to strengthen their balance sheet.

BC:  I think that goes down to shareholder sentiment, making sure the company can show shareholders that it’s concentrating on the right things and its strategies are geared to the right assets of the business. If it’s concentrating on strengthening the balance sheet, that’s where execs are identifying things that may need their attention.

T&R:  Do you have any guidance for corporate treasury, finance, and risk management professionals whose company might be looking at a divestiture before the end of the year?

BC:  I recommend pulling back the covers a little bit and making sure they understand their core assets. Where do they want to concentrate their time and attention? Where do they think they can provide the most value? A lot of times, you can’t easily see that based on how the company currently manages its business. So, the treasury and finance teams need to get ahead of that.

In addition, they should be having strategy brainstorming sessions internally and determining whether there’s an additional layer of work they need to do to understand where some of the non-core assets are—non-core in terms of their true value for the company’s future—so that they can more easily identify where they need to concentrate and identify assets to be divested.

Like I said, it’s not always easily identifiable in the beginning. They may have an idea of what they’ll find, but until they start digging in a little bit, they may not fully understand where those non-core assets lie in the business.

T&R:  So, is gaining this level of visibility something treasury and finance professionals should be working on right now, even if a divestiture isn’t imminent?

BC:  I think so. We always tell companies that you don’t know what you don’t know. The more prepared you can be to understand the issues we’ve been talking about, the better you will be able to go to market, sell assets, or proceed with whatever other decision you make. And the more prepared you are, the more successful you will be when the time is right to make these decisions.