M&A Watch: Bad Times Mean Good Times for Divestitures?

In deal-speak, a divestiture is when a company unloads a division. In fact, there are a variety approaches. For example, one common method is to sell the division for cash to another company. This happened recently with Zimbra, which Yahoo! (YHOO) sold to VMware (VMW).Or, another approach is where a company spins off the division to shareholders and the entity becomes publicly traded. This happened with AOL (AOL) late last year.

Looking back over the years, there have been several divestiture booms. Some of the notable periods include:
  • 1982 to 1987 when major conglomerates sold off divisions to raise cash as well as regain focus.
  • 1998 to 2000 when mainstream companies sold their Internet divisions to the public.
OK, so might we soon see another divestiture boom? Well, to get some insight on this topic, I recently had a chance to talk to Bryan McLaughlin, who is a partner with PricewaterhouseCoopers Transaction Services.

A Pickup Expected

PWC recently conducted a survey involving 215 C-suite executives, corporate development directors and private equity pros. Of this, nearly 70% said they believe that there will be similar or more divestiture activity over the next 12 months. A big reason is that because of the recession and financial uncertainty, there is now pent-up demand to increase deal-making.

There is a valuation gap. All in all, it's a buyer's market; that is, the current valuations are still relatively low despite the recent spike in the equities market. However, if valuations remain low, it will make it difficult to get deals done.

But as confidence comes back and financing gets easier, the valuation gap is likely to shrink. Plus, if a deal involves an auction (which is common), this should help boost the valuation for the seller.

Strategic Considerations

Let's face it, the economy remains lackluster, even though there has been a tremendous federal stimulus as well as considerable help from the Federal Reserve. In other words, Corporate America realizes that to remain competitive, it is important to focus on the strong parts of the business. Part of this means buying businesses and even making some investments.

But, to free up resources and to avoid distractions, it is also important to get rid of non-core divisions. So even if valuations are not attractive, a divestiture still may make sense. Again, look at Yahoo's sale of Zimbra. The company was willing to suffer a loss on the deal so it could refocus on its main consumer Internet business.

There is likely to be tougher due diligence. The PWC survey shows that it is taking longer to close divestiture deals (as much as 50% longer than usual). Part of the reason is that the financing environment is still tough. But the recession has also taken a toll on companies. Thus, buyers want to make sure they limit their downside risks. In other words, is the divestiture really just a way to unload a big problem?

Of course, this can still be an opportunity, so long as the buyer has the ability to make the needed changes to turn things around. In fact, it is during difficult economic times that some of the best deals are completed because the terms are often attractive and the economy will eventually make a comeback.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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