M&A

Sell offs & Divestitures 7

Divestiture
• A Company selling one of the
portions of its Divisions or
undertakings to another Or creating
an altogether separate company

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Why do you decide to Divest?

Pay more attention to core Business

That Division not contributing sufficiently to revenue

Size of Business / Firm has become too big to

handle

Firm in need of urgent cash for other Investments

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• Nowadays more & more companies divest/ sell to
pay off outstanding debt

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Examples
• Toshiba sold off Medical Business to Canon
• Ebay sold off Paypal
• Philips has divested its Lighting Business

Indian story:
• Snapdeal selling
• Payment services unit ‘Free charge’ to Axis Bank for Rs.385
crores
• Logistics business ‘Vulcan Express’ to Future Group Rs.35
crores
• JP Industries selling JP Cement to Birla Cement
• Kishore Biyani sold of Fashion Brick& Mortar business
‘Pantaloons’ to Aditya Birla group
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Contd.
• Reliance Infrastructure sold off ots Mumbai Power
Distribution to Adani Transmission for $2 Bn in august 18
• GVK Group sold Mumbai Airport to Adanis

• PSU Divestment
• Air India sold to Tatas
• Airports at Mangaluru, Lucknow & Ahmedabad sold to
Adanis

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When does a Firm plan Divestiture ?Timing
1. Competitor’s pressure increasing
2. Facing serious problems like :
• No access to new technologies & Developments
• Strong Market entry barriers –geographical presence could not be
increased
• Badly positioned on the supply and/ or demand side
• Critical mass/ economy of scale could not be established
• Distribution capabilities inadequately used
• New business growth strategies could not be developed
• Not enough Capital
3. Getting a Good price
4. Focus on Core competencies
5. In the best interest of shareholders
6. AND pressure from Bankers & Creditors (Ex. Reliance
Coommuni.selling assets to Jio is mainly to pay off dues to Ericsson )

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Factors involved in Divestment decisions
• Opportunistic – Optional
• Planned – well thought-out
• Forced

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Factors responsible
1. Economic
2. Psychological
3. Operational
4. Strategic
5. Govt/Regulator/Legislative

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Economic
1. Opportunistic :
• Tax considerations (Loss making companies )
• Better alternative use of capital
• Profit Motivation
2. Planned:
• Never a Factor at investment level (small market )
• Shrinking margins
• Better use of capital
• Profits motives –less profitable,loss making etc
• Liquidity problems
3. Forced
• Continuing failure to meet goals
• Tax considerations (benefits withdrawn –Videocon Aurangabad)
• Recover some capital /unprofitable/ Liquidity problems
• Regulatory requirements

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Psychological
• Planned
• Eliminate loss making entity quickly
• Effect of loser is contagious –Bad apple theory

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Operational
1. Planned
• Lack of intercompany synergy
• Labour problems in a plant, lack of skilled manpower,
Political reasons etc
• Competitive reasons
• Management deficiencies
• Better to concentrate on most productive areas rather
than spending time on setting right the losing ones
2. Forced
• Over time ,less profit making units start getting lesser
focus in terms of funds and at some point become big
loser
• Labour issues

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Strategic
1. Opportunistic
• Poor Business Fit
• Takeover Defense- Crown Jewel
2. Planned
• Change in Corporate Goals(GE hiving of Finance
Business)
• Change in Corporate Image (Gutka companies becoming
Supari/chocolate companies )
• Technological reasons (when the company feels they
cant support technologically – Google divesting to
Lenova)
• Poor Business Fit
• Takeover defense

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3. Forced:
• Technological reasons ( Nokia, Reliance ADA Group)
• Poor Business fit
• Takeover defense

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Governmental
1. Planned
• Government Directed Divestitures (plan to sell Govt
stake in Banks , Air India , Hotels, Industrial Units etc )
2. Forced :
• Environmental regulations
• Not in interest of Public

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Logics of Sell Offs
1. Efficiency Gains And Refocus
• The competitive advantage which a company has at a point in
time might change over time and it is better to divest (Blackberry
– should they not have divested? Yahoo- should they not have
divested earlier?)
• This will enable the company to refocus –its Management
,Finance etc.
2. Information effects
• Used as a tool to send signals /information to market ,as a result
market may react also (sometimes favorably sometimes not )
3. Wealth Transfers
• It is the shareholders who own the company .Divestiture at the
time helps in money gained on sale getting disbursed to all
shareholders. rather than the assets remaining as security in
hands of lenders

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Divestiture
• Sale of segment of a company to a third
party
• Sale for cash or securities or some
combination thereof
• Assets revalued for purpose of future
depreciation by the buyer

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Motives for Divestitures
1. Dismantling segments of conglomerates which had higher
values as independent operations or better fit with other
firms
2. Sale of original business due to changing opportunities or
circumstances
3. Change in strategic focus which may reflect realignment
with firm's changing environments
4. Adding value by selling into a better fit
5. Firm is unable or unwilling to make additional investments
to remain in a business
6. Harvesting past successes to make resources available for
developing other opportunities
c/o
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7.Discarding unwanted businesses from prior acquisitions to
value-increasing buyer
8. Divestiture to finance major acquisitions or LBOs or stay alive
(snap deal selling Free charge)
9. Divestiture used as a takeover defense by selling off "crown
jewel"
10. Divestiture to obtain government approval of a combination
of segments with competing products
11. Corporate sale of divisions or business units to operating
managements
12. Divestiture of unrelated divisions to focus on core businesses
13. Divestiture of low margin product lines to improve margins
and profitability c/o

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14. Divestiture to finance buying another firm
15. Divestiture to reverse prior mistakes
16. Divestiture of businesses after learning more about them

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Spin-off -contd
• Company distributes on a pro rata basis all shares it
Spin-off
owns in a subsidiary to its own shareholders
Here
• Twoaseparate
part of public
the Business is separated
corporations and
with initially same
a separate firm
proportional is created.
equity ownershipThe existing
now exist
• No money changes
shareholders get proportionate
hands
• Subsidiary's assets
ownership.so thereareis not
no revalued
change in
ownership.
• TransactionSame
treatedshare holders
as a stock in both
dividend
companies
• Transactioninissame proportion.
a tax-free exchange
But there is no fresh inflow of cash

Here shares of the subsidiary ( new

company ) are distributed to all
shareholders of parent in the same
proportion as STOCK DIVIDEND

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Reasons for Spin off
1. Separate identity to a division /business vertical
2. To make the main firm unattractive to a predator by
spinning off as a separate entity ,a valuable division
3. Regulatory requirements – needing separate entity for
doing a business –banks entering insurance

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Disadvantages
• Selling Pressure from Institutions post spin off. This will pull
down the stock price
• Results in No liquidity as no cash flows
• Parent does not get anything monetarily
• often considered as a method to push out a less performing
asset
• New company formed has to face cost of floatation of new
shares
• As share holders in both are same , could result in
duplication of services

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Equity carve-outs (ECO)

• It is a spin off
• But Some of subsidiary's shares are offered for sale to general
public
• Bring infusion of cash to parent firm without loss of control
• Often sell up to 20% in IPO (offer for sale ), later spin off of
remainder of shares, if needed
• Benefits to parent :
• Cash inflow as some shares in the spun off firm is offered to
public as IPO –offer for sale of shares
• Minimises cross subsidies &inefficient uses of capital
• More visibility & opportunity to perform for the carved out
Firm.
• Better performance and so the benefits to management
• Access to stock market by both becomes easy
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• Characteristics of a ECO Candidate :
• Strong growth prospects
• Independent Borrowing capacity (size, asset base,
earnings & growth potential, identity of an independent
co.)
• Unique corporate culture
• Special industry characteristics
• Management performance , retention and Rewards

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• Disadvantages :
• As new shareholders enter , there could be conflict
between existing stake holders needs and desires and
the new ones
• Can affect performance of both firms
• %age of carve out matters .Firms with 70-100% carve
outs perform better
• Will not work if a company loaded with debt or in
trouble is spun off.

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Split-ups

• Two or more new companies with separate legal entity

,come into being in place of original company
• Usually accomplished by spin-offs
• All depts./ units are converted into independent units and
parent ceases to exist
• Shares of new companies are distributed to existing
shareholders of parent company
• As split up firms are small ,they are logistically convenient to
manage
• Likely to bring in more efficiency and effectiveness
• And can result in enhancing share holder value

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Split offs

• Here a new company is formed to takeover operations of an

existing unit / division.
• A portion of the shares of the parent company is
exchanged for the shares of the new company
• Here the equity base of parent company gets reduced
reflecting the downsizing
• Shareholding of new entity does not reflect shareholding of
parent firm
• Similar to spin off, here also THERE IS NO CASH INFLOW TO
THE PARENT COMPANY
Here shareholders of parent
must surrender shares of
parent and exchange the same
with shares of new subsidiary
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Effective Rules of Divestiture
1. Have acquisition teams
2. They choose their divestiture candidates objectively
3. Successful divestors consider how to structure a deal and
to whom they will sell
4. They for how, and how quickly, the deal will benefit the
buyer, make a compelling case

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Effective Rules of Divestiture
1. Have acquisition teams :smart divestors have full-time divestiture
groups, which continually screen their companies’ portfolios for likely
businesses to sell off and think through the timing and
implementation steps needed to maximize value
2. They choose their divestiture candidates objectively :Too many firms
rush to sell in economic downturns, when prices are low. Thoughtful
divestors will sell only those businesses that do not fit with the
corporation’s core and are not worth more to themselves than they
are to any other company.
3. Successful divestors consider how to structure a deal and to whom
they will sell: As carefully as they consider what units to sell and
when. And they are as meticulous about planning the implementation
of a deal as savvy acquirers are about post merger integration.
4. They for how, and how quickly, the deal will benefit the buyer, make
a compelling case and they make sure the selling unit’s employees
will be motivated to stay on and realize that value.

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To make the right divestiture decisions, apply these four rules
recommended by Mankins, Harding, and Weddigen:
1. Establish a team focused on divesting.
2. Divest businesses that don’t fit with your company’s long-
term strategy and that would create more value in
another firm’s portfolio.
3. Make robust plans to separate out the divested
businesses.
4. Clearly communicate what’s in the deal for buyers and
employees.
Companies that apply these rules strengthen their core and
create twice as much value for shareholders.

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1.Establish a Dedicated Team

• Assemble a team that regularly screens your company’s

businesses for divestiture candidates and considers issues
such as timing.
• Have the team establish relationships with investment
banks, which often know potential buyers even outside
sellers’ primary markets.
• As more companies—particularly private equity firms—have
focused on deal-making disciplines, buy-side returns have
improved over the past few years. Buyers are now just as
likely as sellers to create value—which was far from the case
during most of the 1980s and 1990s.
• The best divestors approach divestitures with the same
level of planning and rigor that their counterparts in
corporate development bring to acquisitions.
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• They have established sell-side teams, which are
constantly screening their company’s portfolio for
divestiture candidates and are continually thinking through
the timing and implementation steps needed to maximize
value.
• In most cases, teams have standing members with unique
skills—such as experience in separating accounting
systems, specialized HR expertise, or the ability to set up
detailed service-level agreements between the corporation
and the divested businesses.

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2.Test for ‘Fit and Value’

• Regularly identify divestiture candidates—businesses that

meet these criteria:
• Fit. Keeping them isn’t essential to positioning your
company for long-term growth and profitability.(fit for
dispensing with )
• Value. They’d be worth more in any other company’s
portfolio than in yours.(More value to others)
• By applying these two tests, you’ll fetch better prices for
your divested businesses. That’s because you’ll sell on your
own terms. And stock values are likely to increase, since
investors will expect your company to grow briskly as a
result.

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Sell, milk or transform ….
• it makes the most sense to sell a business while potential
acquirers can still extract value from the operations and take
steps to reignite profitable growth.
• Yet our observation is that when faced with the three choices for
dealing with an underperforming business—sell, milk, or
transform—too many companies become de facto milkers.
• Unwilling to sell, but unable to support the level of investment
required to transform an underperforming business, these
companies hold on, often for many years, until the unit has lost
much of the value it once had. (Ex.: Yahoo. May be snapdeal )
• To avoid the milking trap and identify the right divestiture targets,
the best divestors apply two criteria—fit and value.
• To determine fit, management asks: Is keeping the business
essential to positioning the company for long-term growth and
profitability?

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• To judge value, management must work out whether the business is
worth more held in the company’s portfolio than it is anywhere
else.
• It takes discipline to apply these tests consistently. In our
experience, executives are moved to divest not when it’s best for
the company but as a reaction to the business cycle. They’re most
reluctant to sell assets when economic conditions are good and
potential asking prices are at their highest, and they can’t wait to
sell when the economy slows, values fall, and buyers dry up.
• By adopting the fit and value tests, companies become far better
able to sell at the right time.
• The benefits of this approach are twofold:
• Divested assets usually fetch better prices because companies are
able to sell on their own terms,
• Markets are more forgiving of such a strategic readjustment when
investors expect the company will grow at a heady pace as a result.

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• To be a candidate for divestiture, a business must fall short on both
criteria—that is,
1. it must be neither core to the company’s strategy
2. nor more valuable to the company than to anyone else.
• Some businesses may not be core but can still be managed more
profitably by the company than by any other entity:
( Some businesses that are worth more to others should
nevertheless be retained to build or sustain a competitive advantage
elsewhere in the portfolio: Coca-Cola’s continued participation in its
heritage fountain business, for example, creates distribution and
other advantages for the company in its core soft drinks business. )
• In short,
• Companies should sell only those businesses that are not
important to their core and have more value to other firms
than to their own.

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• The unit’s long-term fundamentals must be sound.
• The unit’s revenues must reach a certain threshold

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3.Plan for De-integration

• Determine whether you’ll divest a business by selling it

outright or spinning it off as a separate entity with its own
shares.
• Choose which assets will be separated from your company
and transferred to the divested unit. Decide how you’ll deal
with shared overhead costs, brands, and patents. Unravel
cross-company systems and processes, considering whether
both companies should share some of these for a time.
• Once executives have decided to divest a unit, they must
determine what type of separation will best meet the
company’s needs and then carefully think through the
implementation steps required to generate the maximum
value from the separation.

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• Divestitures can take two main forms.
1. outright sale, either to strategic buyers. (Ex Ford’s
recent sale of its premium Land Rover and Jaguar auto
lines to India’s Tata Motors)
2. or to private equity or other financial buyers
(Lakshmi Vilas Bank selling equity to Capri Global
Holdings , Capri Global advisory etc)
• In other circumstances, a divestor will spin off or carve out
the target as a separate entity, with its own shares.
• Each approach has benefits and costs, and the best
divestors consider how to structure the deal and to whom
they will sell as carefully as they do what units to sell off and
when..

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Making Separation Pay
• Corporations are not private-equity firms—they are not in
the business of buying and selling assets.
• But they need to be just as savvy about how to structure a
divestiture deal and whom to sell to. Here’s the best
thinking about the “how” and the “who” of divesting.
The How
• Once a company has decided that a unit is not vital to its
core, it must determine how best to separate it out. That
involves answering two important questions:
• Do we sell for cash or stock?
• Do we sell the whole business or a piece of it?

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• Do we sell for cash or stock?
• In most cases, selling a business for cash makes the most
sense.
• Sometimes , spinning off a division to shareholders can
be a better bet—either because the seller has no use for
the cash proceeds (and doesn’t want to hold them for
fear of becoming a takeover target)
• or because a spin-off would produce higher after-tax
proceeds.
• Do we sell the whole business or a piece of it?
• Most of the time, it’s easier to sell a whole business than
to break it up into pieces.
• In some cases, though, selling the whole business is not
desirable or not feasible.
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The Who (Buyer)
• Identifying the right buyer for divested assets involves
answering two additional questions:
• Who will pay the highest price?
• Typically, the company that makes the best offer is the
one that views the property as the most strategic.
• But sellers can’t assume that buyers will intuitively
understand their own strategic advantages, nor can
sellers count on investment banks to tout the deal’s
potential effectively.
• The key to maximizing the sale price is seeing the
divested business through the buyer’s eyes and
tailoring the sales pitch accordingly. (reverse due
diligence)
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• Is one buyer better than another from a strategic standpoint?
• In the vast majority of cases, selling to the highest
bidder will create the most value for the divestor’s
shareholders. But not always.
• (Had Ford sold its Jaguar and Land Rover brands to an
automaker with a wide range of products that
overlapped with Ford’s core business in many markets,
rather than to the less-entrenched Tata Motors, the sale
might have created competitive pressures on Ford’s
other auto lines.)
• Thus, in deciding whom to sell to, divestors must be
careful to account for the competitive threat posed by
each potential buyer

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• Communicate the Deal’s Benefits for Buyers and Employees
• Prepare convincing and honest answers to these questions:
• What actions would improve the divested company’s profitability
or growth?
• When will the buyer achieve the deal’s full potential value?
• How should the buyer and seller share the value unlocked
through the divestiture?
• What rewards (generous completion bonuses? severance
packages?) will employees in the soon-to-be-divested business
get by keeping it humming until the deal closes (and beyond)?
• Most corporations are geared up to buy assets, not sell
them—the majority acquire three businesses for every one
they divest. So when they decide to sell, many do it at the
wrong time or in the wrong manner. Those are expensive
mistakes.

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Case of Gillette ,P&G
• Though not strictly a divestiture, Gillette’s sale of itself to Procter &
Gamble in October 2005 illustrates the payoff that both parties can
realize from carefully addressing the first two questions. P&G had been
interested in Gillette for years—viewing Gillette’s franchise in razors and
blades, and its emerging strength in toiletries, as an ideal extension to
its own consumer products portfolio.
• Gillette resisted selling as late as 1999. But after Jim Kilts became
Gillette’s CEO in 2001, he and his executive team carefully analyzed the
potential value to P&G of pushing Gillette’s products through P&G’s
distribution network.
• Gillette then provided P&G with a detailed plan for realizing potential
synergies on both the cost and revenue side. So compelling was its
presentation that it was able to negotiate a price ($57 billion) that
allowed Gillette’s shareholders to reap all of the potential cost synergies
from the transaction.
• That’s because the revenue synergies for P&G were demonstrably large
enough to justify the premium it paid to acquire control.

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The Smart Way to Divest
• Rule 1
Dedicate a team to divestment full-time, just as you do
with acquisitions.
• Rule 2
Establish objective criteria for determining divestment
candidates—don’t panic and sell for a song in bad times.
• Rule 3
Work through all the details of the de-integration process
before you divest.
• Rule 4
• Make sure you can clearly articulate how the deal will
benefit the buyer and how you will motivate the unit’s
employees to stay on until the deal is done.
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Voluntary Liquidation
• LIQUIDATION
• Liquidation or winding up is a Legal
term and refers to the procedure
through which the affairs of the
company are wound up bylaw.

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• Winding up of a company has been defined in the
Companies Act 1956as “ the process whereby its life is
ended and its property is administered for the benefit of its
creditors & members.
• An Administrator called the Liquidator is appointed and he
takes control of the company, collects its assets , pays its
debts & finally distributes any surplus among the members
in accordance with their rights.

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• Section 425 (1) of the companies act provides that a
company can be liquidated in any of the following three
ways :
• COMPULSORY WINDING UP BY THE COURT
• VOLUNTARY WINDING UP BY THE MEMBERS
• WINDING UP UNDER THE SUPREVISION OF COURT
• Generally the provisions of the Act with respect to the
winding up apply to winding up of a company whether it be
by the court or voluntary or subject to the supervision of
the court [Section 425 (2)]

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VOLUNTARY WINDING UP BY THE MEMBERS
• CONSEQUENCES OF WINDING UP
• The following are the consequences of winding up:
1. An officer called a liquidator is appointed & he takes over
the administration of the company. He may be appointed
by High Court, members or by the creditors as the case
may be.
2. The powers of the board of directors will cease & will now
vest with the liquidator.
3. Winding up order or resolution of voluntary winding up
shall operate as a notice of discharge to all the members
of the company. Members of company are called
CONTRIBUTORIES

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4. Liquidator of the company will prepare a list of
contributories who be made liable to contribute to the assets
of the company in case assets are not sufficient to meet the
claims of various claimants . In case there is a surplus in the
assets, the liquidator of the company will prepare a list of
those members, who are entitled to share this surplus.
5. Liquidator of the company will collect & realise its assets &
distribute the proceeds among right claimants as per the
procedure of the law.
6. Winding up ultimately leads to dissolution of the company.
The companies life will come to an end & it will be no more an
artificial person in

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ORDER OF PAYMENT
• The amount received from the assets not specifically
pledged & the amounts contributed by the contributories
must be distributed by the liquidator in the following order:
1. Expenses of winding up including the liquidators
remuneration
2. Creditors secured by the floating charge on the assets
of the company
3. Preferential creditors
4. Unsecured creditors
5. The surplus, if any, amongst the contributories (i.e.
shareholders)

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• Preference shareholders
• Get the priority over the equity shareholders as regards the
payment of their capital & the dividend payable upto the ate of
winding up.
• The holders of cumulative preference shares are entitled to arrears
of dividend if there is a surplus after the return of the amount of the
equity shareholders or if the Articles state that arrears of preference
dividend are to be paid before anything is paid to equity
shareholders.
• EQUITY SHAREHOLDERS
• Any surplus left after making payment to preference shareholders is
distributed among the equity shareholders if all the shares are
equally paid up.
• But if the shares are called in unequal proportions, the liquidator
should see that the capital contribution by the shareholders should
be the same.
• It may be remembered that calls in advance will have priority

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PREFERENTIAL CREDITORS
• Under Section 530 of the Companies Act , the following
creditors are treated as preferential creditors:
1. all revenues, taxes, cesses & rates payable to the
government or local authority will be treated as
preferential creditors provided that it must become due
within 12 months before the date of winding up.
2. 4 months salary & wages due to the employees of the
company will be treated as preferential provided that it
must become due within 12 months before the date of
winding up. Maximum of Rs. 20000 will be treated as
preferential creditors.
3. All accrued holiday remuneration payable to an
employee due to termination of his employment is
payable
SFM 10 FD&CR 55
4. The person who advances money for making the
payment under (ii) & (iii) mentioned above will be treated as
preferential.
5 Any sum payable by the company under the
Employees State Insurance Act, 1948 will be treated as
preferential provided that it must become due within 12
months before the date of winding up.
6 Compensation payable by the company under Workmen
Compensation Act, 1923 is treated as preferential.
7 Any sum payable by the company to its employees from a
Providend Fund, Pension Fund, Gratuity Fund or any other
fund maintained for the co.

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Bust-Up Takeover
• A bust-up takeover is a corporate buyout in
which the acquirer sells off a piece of the
company in order to pay down some of the
debt used to finance the initial buyout.
• The acquirer buys the company by taking on
debt and then repays it with the target's assets
once it has control.
• This strategy is used in cases where the target
company has undervalued assets that the
acquirer seeks to exploit.

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• This style of buyout is a type of leveraged buyout, an
acquisition of a company using a significant amount of
borrowed money to meet the cost of acquisition.
• These acquisitions require the acquirers to conduct an in-
depth analysis to adequately value the target company's
assets and to ensure that the return on those assets pays for
the added cost of debt.
• If the target company has significantly undervalued assets
and the acquirer has little cash (and so needs debt to fund
the purchase), this strategy could be implemented to
successfully unlock value.

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Thank you

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