Divestments are best done quickly but certain strategies should be in place to make sure the separation creates value. An article by McKinsey partners Obi Ezekoye and Jannick Thomsen, Going, going, gone: A quicker way to divest assets, sets out some of the strategies that make speedy spin-offs a success for the parent company and the newly created entity.
Getting the divestiture process done quickly is important. Separations that are completed within a year of being announced deliver higher excess total returns to shareholders (TRS) than those that took longer, according to a McKinsey study of major divestitures valued at more than $500 million between 1992 and 2017. The McKinsey authors write: “Delays in execution can be a sign that management teams have not carefully and objectively considered operational, organizational, and other tactical factors associated with the divestiture. Worse, long deal timelines can suggest the loss of critical talent,struggles with internal politics, and even key stakeholders’ questioning of the strategic rationale for the deal. And make no mistake, the longer it takes to separate, the more anxious employees, customers, and investors in the market can get.”
4 strategies for a swift completion
But to move quickly once you've gone public a spin-off, considerable preparation is needed before it's announced. McKinsey identifies four strategies to get the process off to a flying start (and towards a swift completion). The four strategies are:
- establish a dedicated divestiture team that has the skills necessary to ensure efficient management of the deal;
- structure incentives so that leaders of the parent company and the soon-to-be-divested company are encouraged to act in the best interests of the departing business;
- actively anticipate the complexities associated with disentangling the divested business from the parent company; and
- use transition-service agreements (TSAs) sparingly to prevent either side from hanging on too long.
CTMfile take: This article drives home the message that preparation by the organisation's senior management is key to a good, value-creating carve out or divestment.
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