New research has revealed how divestments are moving to the centre of strategic M&A plans, as companies seek to streamline their operations, and focus capital resources in their core businesses. However, changes in the commercial and regulatory landscape have made deals less certain and more complex, with divestments taking longer to complete – with most companies spending on average three to six months on a routine deal, increasing to one to two years for larger deals – according to an in-depth international study from Eversheds law firm.
In 2013, Eversheds published its M&A Blueprint, a report of acquisition processes which concluded integration and acquisition procedures needed to be more aligned. This report, Streamlining for Success, which examined the views of over 150 senior lawyers and executives across 34 countries, reveals a step change in how divestments are being managed, particularly among the most experienced practitioners. More than half (57%) said they were taking a new approach to divestments, with those who had worked on 10 or more deals in the past five years being the most likely to change their approach to make deals more certain to close.
These sellers are now spending significantly more time in the early stages of the deal, with a noticeable shift from a ‘sign and manage’ process to a ‘manage and sign’ approach, which involves starting deal preparation earlier, creating detailed separation plans and more vendor due diligence. This follows the approach Eversheds has been developing with its new Dealmaster tool.
In assessing potential buyers, more than half of respondents (54%) said price was not their main consideration, with deal certainty taking precedence for many sellers. Consequently, sellers are focussing on other issues such as the buyer’s historic track record and credibility in completing deals and running a business, the likelihood of competition or other regulatory delays, and the welfare of employees or other stakeholders.
Despite this step change, the study shows that there is still significant conflict within businesses around how to manage divestment activity. More than two thirds (72%) of in-house lawyer respondents had experienced tensions or significant differences with their business colleagues when planning a divestment. The common complaint among this group was that divestments were more complicated, yet did not receive the same attention from the business as acquisitions.
Added to this, the study reveals the most problematic area of a divestment to be around understanding precisely what is being sold. This is due to the 20-year trend in integrating businesses into shared service centres rather than maintaining standalone operations and systems. The top challenge cited by respondents were the difficulties in identifying and valuing assets for sale and allocating appropriate costs to these assets. IT separation and transfer, centralised finances and crossover of employee and management function emerge from the report as particularly problematic areas for businesses and are the current drivers for a more planned approach. Respondents highlighted how the lack of integration between a business’ legal, IT and commercial personnel makes it difficult to identify potential issues in this area, leading to delays and post-closure issues.
When it comes to cross-border sales, navigating the regulatory landscape has proved to be a significant obstacle for the majority of businesses (70%). Respondents highlighted Europe, China and Latin America as the most demanding or opaque in their regulatory requirements. The report reveals and planning early planning to be essential on cross border deals.
Robin Johnson, partner at Eversheds law firm, said:
“Put simply, breaking up is becoming much harder to do. Separating assets is increasingly complicated due to the centralised nature of many organisations. 2015-2017 are likely to see more separations as activity and C-suite executives look for better returns on capital ratios. Deal teams must have the opportunity to prepare their businesses for the challenges they face on complicated divestments. This requires a much closer working relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations team executing the commercial transaction and separation plans – a point that came through very clearly from the businesses involved in the study.
“It is clear from the report that businesses need to look closely at their current processes around managing divestments to ensure they maximise the benefit of such deals, rather than tying themselves up in separation knots further down the line which could have been avoided at an earlier stage.”
Collectively the respondents to the Eversheds study have worked on more than 2,400 M&A deals across 60 jurisdictions during the past five years. Nearly two fifths of these were divestments. Drawing on this vast experience, the study concludes with six key points to increasing deal value and certainty:
- Adopt a clear and cooperative approach to communicating with the buyer
- Keep in regular contact with local management at the target company to maintain morale
- Have clear separation plans, which you share with the buyer
- Keep a close eye on conflicts of interest
- Build flexibility into legal contracts
- Plan for delays
Robin Johnson concludes:
“The report shows that a typical separation does not end at completion of the divestment and, often, due to transitional issues, separation can continue for years after the deal has supposedly closed. As the Eversheds M&A Blueprint revealed integration teams to be essential for the buyer, Streamlining for Success shows separation teams for the seller to be equally important.”
Notes to editors
About Eversheds LLP
Eversheds LLP and its worldwide offices have over 4,000 people who provide services to the private and public sector business and finance community. Access to all these services is provided through 55 international offices in 29 jurisdictions. Eversheds combines local market knowledge and access with the specialisms, resources and international capability of one of the world’s largest law firms.
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