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Eversheds report reveals strategic step change in divestment activity

Eversheds report reveals strategic step change in divestment activity

  • Switzerland

    20-05-2015

    • 41% of businesses are now equally focused on divestment and acquisition activity
    • 54% of businesses said price was not their main consideration, with deal certainty taking precedence
    • Study reveals a shift towards a ‘manage and sign’ approach rather than ‘sign and manage’

    New research has revealed how divestments are moving to the centre of strategic M&A plans, as companies seek to streamline their operations, and focus capital resources in their core businesses. However, internationalization and constant changes in the commercial and regulatory landscape are making deals less certain and more complex, with divestments taking longer to complete. According to an international study from law firm Eversheds, most companies spend on average three to six months on a routine deal, increasing to one to two years for larger deals.

    In 2013, Eversheds published its M&A Blueprint, a study of acquisition processes which concluded integration and acquisition procedures needed to be more aligned. This new report/study, Streamlining for Success, which examined the views of over 150 senior lawyers and executives across 34 countries, reveals a change in how divestments are being managed, particularly among the most experienced M&A practitioners.

    These sellers are now spending significantly more time in the early stages of the deal, with a noticeable shift from a ‘sign and manage’ process to a ‘manage and sign’ approach, which involves starting deal preparation earlier, creating detailed separation plans and more vendor due diligence. Eversheds follows this approach with its new IT-based “Dealmaster” tool, which, thanks to standardized empiric data from most of the jurisdictions, facilitate the planning and processing of transactions.

    More than half of respondents said price was not their main consideration, with deal certainty taking precedence for many sellers. Consequently, sellers are focussing on other issues such as the buyer’s historic track record and credibility in completing deals and running a business, the likelihood of competition or other regulatory delays, and the welfare of employees or other stakeholders.

    Despite this step change, the study shows that there is still significant conflict within businesses around how to manage divestment activity. More than two thirds of in-house lawyer respondents had experienced tensions or significant differences with their business partners when planning a divestment. The common complaint among this group was that divestments were more complicated than acquisitions, yet did not receive the same attention from the executives as acquisitions.

    Added to this, the study reveals how important it is for parties to understand precisely what is being sold. This is due to the trend in integrating businesses into shared service centres rather than maintaining standalone operations and systems. Challenges cited by respondents were the difficulties in identifying and valuing assets for sale and allocating appropriate costs to these assets. IT (resources) separation and transfer, centralised finances and crossover of employee and management function emerge from the report as particularly problematic areas for businesses. Respondents highlighted how the lack of integration between a business’ legal, IT and commercial personnel makes it difficult to identify potential issues in this area, leading to delays

    When it comes to cross-border sales, navigating the regulatory landscape has proved to be a significant obstacle for the majority of businesses. Respondents highlighted Europe, China and Latin America as the most demanding or opaque in their regulatory requirements. The report reveals early and foresighted planning to be essential on cross border deals.

    Marc Nufer, partner at Eversheds law firm, said:

    “Divestments are becoming much harder to do. Separating assets is increasingly complicated due to the centralised nature of many organisations. Deal teams must have the opportunity to prepare their businesses for the challenges they face on complicated cross-boarder divestments. This requires a much closer working relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations team executing the commercial transaction and separation plans - a point that came through very clearly from the businesses involved in the study.“

    Businesses need to look closely at their current processes around managing divestments in order to reach the objectives of such transactions. A forward-thinking planning can avoid future problems and has a positive impact on costs.”

    Collectively the respondents to the Eversheds study have worked on more than 2,400 M&A deals across 60 jurisdictions during the past five years. Nearly 40% of these were divestments. The study concludes with six key points to increasing deal value and certainty:

    • Adopt a clear and cooperative approach to communicating with the buyer
    • Keep in regular contact with local management at the target company to maintain cohesion
    • Have clear separation plans, which you share with the buyer
    • Keep a close eye on conflicts of interest
    • Build flexibility into legal contracts
    • Plan for delays

    Marc Nufer concludes:

    “The report shows that a typical separation does not end at completion of the divestment and, often, due to transitional issues, separation can continue for years after the deal has supposedly closed. As the Eversheds M&A Blueprint revealed integration teams to be essential for the buyer, Streamlining for Success shows the role of separation teams for the seller to be equally important.”

     

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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