Platt Perspective on Business and Technology

Acquisitions and divestitures 2: conceptually and operationally organizing and understanding what is to be divested and acquired 1

Posted in strategy and planning by Timothy Platt on April 4, 2013

This is my second installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Part 1: right-sizing and orienting for business strength and growth.)

I began this series in Part 1 with a briefly sketched list of issues that would enter into this discussion and begin working my way through that list here with its point one, which I rephrase for content as follows:

• If a business, in seeking to keep its own organizational structure and process lean and strategically focused, decides to divest itself of a commoditizable portion of its business as a profit-generating way to divest itself of excess or disconnected resources, what might it package for sale in this way, and how would it decide what to include here?

I also added “why” in my Part 1 bullet point and will address that here too. And I begin this posting with some basic questions that should go into any decisions to acquire, maintain, drop as a write-off or divest as a marketable offering.

1. What is the core, differentiating source of value that a business would provide, and either in its products and services, or in how it brings them to market, that would set it apart and give it competitive strength and position? What is minimally and obligatorily required for this business to develop and sustain its sources of unique value offered, as a lean and agile organization? This can only be answered reliably and fully, with everything needed included and all else trimmed out, on the basis of careful and point by point analysis, considering all resources in place and processes and procedures through which they are utilized. (Level 1 resources.)
2. Now, and also in keeping with a realistic lean and agile approach – here geared both towards cash flow and profitability and risk management, what buffering should be added in for resources held and processes and procedures followed, to allow for the realistically possible and reasonable but perhaps unexpected? (Level 2 resources.) This is where basic business flexibility enters in, and capacity to respond with agility and speed to new and emerging opportunities and challenges in remaining effectively competitive.
3. And what capabilities should be in place for ramping up resources and capabilities beyond that in the event of bad and worst case scenarios becoming this business’ working realities? (Level 3 resources.) This is where due diligence and risk remediation enters in, and where backup servers and other necessary contingency resources are categorized. This, I add is also were at least certain mandatory resources such as insurance coverage would be included.

With write-offs and monetizable divestitures in mind, I add one more category to that classification list:

4. What is left over that is there and being maintained and perhaps even at significant ongoing cost, but that does not directly and necessarily support the business and its financial and competitive positions? (Level 4 resources.)

So this posting is about identifying level 4 resources and how they are reliably and distinctly appropriate to that categorization, and beyond that, determining their marketable values, net any costs for bringing them to market as a part of a rightsizing process.

1. It makes more sense financially to simply discard and write off resources that could not be marketed except at a loss for doing so, and that could not be presented as having marketable value to others. Consider old and broken hardware here, that would not be considered salvageable through recycling programs as a working example.
2. It may make sense to donate resources that would offer no or low return to the providing business, but where their offering would provide real value to others. Donating old and outdated but working computer equipment to a school or charity comes immediately to mind for me here, though there are a great many other possibilities here that make equal sense. And along with offering tax deductions, this type of charitable activity can offer tremendous marketing value by highlighting the positive values of the donating business and its employees.
3. Some resources might be directly separately sellable and for an immediate profit. Think of this as resource-by-resource piecemeal divestiture. Here I state “profit” as I assume that any value to the business will have already been written off so its listed value in place is zero.
4. Some resources, and even if directly marketable and sellable for a profit as piecemeal divestitures, might also hold opportunity for greater returns, if organized and bundled, and marketed and sold as value added bundles in combination with other component elements. For purpose of this and subsequent discussions I would identify this option and approach as value added divestiture. This can mean anything up to divestiture of a complete working but strategically disconnected organizational unit of the business.

Distinguishing between these four categories meaningfully, and capturing value for returns on investment if not outright profit calls on holding a detailed understanding of the available marketplace for what is to be offered – which essentially by definition is going to be different from the marketplace and market space that the business works in as its main venue of value creating and selling activity. If it only looks to its own markets for this, for example in reducing excess resources of a type it uses, it is primarily going to building up its own direct competitors. Making a profit and organizing and selling off excess or unneeded resources without simply strengthening the competition is going to require in practice at least, marketing to non-competing businesses or organizations. (The one potential exception I can think of here would require something in the way of non-compete agreements that would for example carve up sales territories, but that would in most cases violate any antitrust or competition laws in place.)

And with this, I add a complication to this developing narrative:

• A value added divestiture might come together as a profitable offering by combining excess or fundamentally unneeded resources together with resources more valuable to and central to the selling business, where the combination so produced offers more return value to the seller than simply holding onto those resources would.

And with this, I reach a point where discussion turns to building and evaluating a value added divestiture, and terms of acquisition and use by any buyer – where at least hopefully, antitrust laws would not be a source of due diligence concern. I am going to continue this discussion at that point in my next series installment. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.

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