Corporate Divestitures - Value Creation for CFOs
Large corporations often have divisions/departments that no longer fit within the overall company’s strategic vision. In many instances, these are areas of the business formed during periods of active inorganic growth or extensions of the company’s then core services. Over time, the shift in the company’s strategy makes these areas of the organization less critical. While there are / can be growth opportunities for these “orphaned” divisions, decision makers are often reluctant to invest due to the opportunity cost of resources focused on the core strategic initiatives. When situations like these persist, senior executives decide to divest these non-core assets and redeploy the capital to increase shareholder value.
Here are some considerations for company CFOs:
Improved valuation to shareholders: It is important to identify these underutilized resources and understand how they can help the organization benefit from their sale. Divesting assets can reshape the company’s positioning and lead to increased valuations. For example, a business with core services in a higher valued growth sector can trade at lower valuation multiple (due to non-core divisions) when assessed on a consolidated basis. Market reaction to divesting of non-core, lower valuation divisions can be favorable and drive immediate benefit to shareholders.
Assign responsibility to Identify ideal targets: Working with Strategic consultants / M&A advisors can provide an efficient option to identify opportunities ripe for divestiture. Investment bankers / M&A advisors can leverage their understanding of market demand to guide the company’s corporate development team and provide input on optimal timing. Understanding the interest for these non-core assets and how to present to external investors will be critical to achieve optimal value and speed to close.
Perform reviews regularly: Plan to review every division annually and assess how it fits into the company’s 3-5 year strategy. While most organizations review division performance and profitability regularly, it is important to assess this qualitative aspect of the division annually. Often these non-core divisions can include team members who are underutilized and / or have skills that can be shared across the organization. Once a divestiture candidate is identified, the team should determine expected timelines and use for funds post transaction. Especially for publicly traded organizations, having a clear plan and timeline will ensure the divestiture receives optimal market reaction. In one recent example, Shopify received favorable market reaction from its May 2023 decision to divest its fulfillment network businesses (Deliverr and 6River Systems). Immediately following the transaction, the company’s stock price traded over 60% premium to 12 months prior and continues to be valued higher than when these assets were part of the company. Company management clearly communicated its plan to refocus on its product acceleration and the divestiture supported this initiative.
Kintsugi believes many organizations have divisions with unlocked potential. As experienced operators and executives in prior roles, the Kintsugi team is well suited to help guide these division leaders once operating as a stand alone company. KCP has a successful track record of building businesses from scratch and post corporate carveout. With a deep resource pool ranging from human capital to technology and financing, Kintsugi can provide CFOs assurance in speed to close and confidence knowing their divested asset will be managed well.
