Carve-outs / Divestitures

Question

Any suggestions on issue trees / considerations for carve-outs / divestitures? I know what aspects to consider for mergers/acquisitions, but there are definitely additional considerations for carve-outs such as stranded costs etc. I've had a hard time finding practice case studies around this topic. Thanks in advance!

Answer 1

Hi Anonymous,

in the analysis of divestitures I would consider the following areas:

Clarify the goal – what does the company want to reach with the divestiture (higher profits, lower costs, etc)?
Identify the market evolution for the business line that could be sold – this will help to understand what could be expected from that branch in the future.
Identify if it is feasible from a quantitative point of view to reach the goal identified in step 1 thanks to the divestiture. In doing so, you should consider possible synergies and cannibalization with other areas,possible sunk costs present and the opportunity cost to invest in such branch versus other business lines.
Even if the business line divestiture helps to reach the goal, verify if it is possible to sell it for the appropriate price.
Consider any risks involved with the reduction of business activities not already included in the previous analysis – eg decrease of diversification

Hope this helps,
Francesco

Answer 2

Hi Anonymous,

in assessing whether a divestiture of a particular business line makes sense, there are a couple of different angles you might want to consider:

Profits: you should first check whether the business line generates profits, and what the outlook to the future is (will it generate profits going forward?).
Profitability: Not to be consfused with profits - how much profit is generated relative to resources spent (i.e., profits over cost)? Thereby, you check whether there are better options for utilizing resources (e.g., other lines of business that could be expanded)
Cannibalization: Even if profits and profitablity look good, cannibalization could eat into other areas of business. So this should also be checked.
Natural ownership: there might be other companies that, due to their particular asset base or footprint, can extract more value out of your business line. In that case it might be worthwhile to sell off this particular line of business for a price that exceeds expected profits over your target time horizon.

All of these aspects should be succinctly outlined and then assessed (either all of them one by one (in order of priority according to your hypothesis), or following guidance by the interviewer).

Hope this is helpful!

Cheers,

Sidi