Valuation experts involved in corporate divestitures would do well to read a new study from Ernst & Young. It concludes that sellers are not extracting all the value they deserve from buyers.
Separation woes: The authors outline five practices that should be used to enhance the “value story” of a divestment: (1) a structured process for regular portfolio reviews; (2) appealing to a broad range of buyers; (3) articulating a unique story for each potential buyer; (4) a rigorous process; and (5) separation planning. This last process, separation planning, is easily underestimated. Therefore, care should be taken in assessing the value of stranded costs, one-time separation expenses, business continuity costs, and the impact of unwinding tax structures.
Asked how they enhance the “value story” of a divestment, respondents say that they follow certain strategies, such as supporting the market/product growth story with an independent review, developing an M&A plan for potential investors, providing their own view of synergy opportunities to buyers or developing a range of potential upsides. However, no more than 50% of respondents implement these strategies. Clearly, more companies need to follow these practices to enhance divestment value.
The study says: “The greater the clarity sellers are able to provide, the greater the likelihood that they will extract more value from the sale.”
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