Platt Perspective on Business and Technology

Acquisitions and divestitures 3: conceptually and operationally organizing and understanding what is to be divested and acquired 2

Posted in strategy and planning by Timothy Platt on April 9, 2013

This is my third 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 and Part 2: conceptually and operationally organizing and understanding what is to be divested and acquired 1.)

I took an overview approach in Part 2 in which resources were broadly categorized according to their fit in the owning organization – where fit specifically refers to capacity to contribute to financial and competitive strength and position. And as a lowest value-supporting level in this, I identified resources that might make good marketable divestiture offerings as Level 4 resources (see the definitions and their organizing resource taxonomy as outlined in Part 2.) And I ending that series installment taking a very high level black box view of potential divestiture offerings, where only costs, and potential returns on investment and profits were considered – but not the details of what goes into them.

• My goal for this posting is to break open the box to see what would go into a divestiture package, or from the acquiring business’ perspective a potential acquisition.

And I begin addressing that by noting that an effectively architected divestiture consists in many if not most cases, of a complex and well-considered mix of components. The best way to explain and analyze that is with a working example, so for a focus of discussion consider a very large and diverse information technology company that had its start, and built its initial national and international reputation on computer hardware and supporting software. When desktop computers opened up as a significant and then even major sector in this market space and industry, they moved into that too with their own lines of hardware – outsourcing operating system and end user oriented software (e.g. office productivity tools) to other businesses that specialized in that emerging market and its needs. They went through some significant downturns and recoveries over the years, and found themselves at a point where software, and particularly back-end and business infrastructure-supporting and enabling software was a much more important source of growth and market strength for it than its desktop computer hardware division – though it was still developing very significant levels of income and profit from its still ongoing mainframe and supercomputer lines and it had developed a very extensive and profitable business practice from business consulting, and on helping client companies to more effectively select and us their resources to drive business and generate profits. So it decided to divest itself of its desktop computer hardware division and move on, and ideally with a profit from the sale of this systematically organized asset as well as a reduction of what was rapidly becoming a strategically disconnected source of expenses. They found a buyer that would work with them in this in China, and a contractually organized and defined deal was brokered. Yes, the corporation I write of here is IBM and I have trimmed a lot of details out of the above description (e.g. their earlier pre-electronic computer history and their very active involvement in the still emerging field of nanotechnology, to cite just one overlooked business line.) The company that I note as having bought out IBM’s personal computer business is, of course, the Lenovo Group, Ltd.

• When a business acquires a large, complex holding such as an entire division or business line from another large company, they actively seek to acquire a workable and rapidly if not immediately productive business system, with hardware and design specifications, copyright and patent control and ownership, and more, that they can integrate into their overall business operations as a source of profitability for them.
• This may or may not include all of the physical plant space that has been dedicated to the operations included in a divestiture – building sites and certainly where a buying business is located in another country and when it has what for itself, is an in-country location for this acquisition in mind that would be more cost-effectively available. So everything in a proposed divestiture package might not hold equal or even significant value to a buyer. That has to be taken into account by both involved parties.
• This type of deal might or might not include expectation that employees and managers who worked in that area of the selling business would stay on. But at the very least this would almost certainly include abrogation of any non-compete agreements that those employees had signed with the selling business, so the buying business would be legally allowed to negotiate with them to stay on through the transition.
• For businesses in a country such as China, technology transfer agreements are always on the table as an obligatory requirement, so transfer of proprietary information ownership, licensing and other arrangements always have to be decided upon, and across agreed-to timeframes as well as for immediate here and now purposes.
• And there are definitely situations (e.g. where anti-monopoly laws might come into play, or where national security concerns might block or limit a foreign sale) where outside regulatory law might become involved.

Ideally, both divestiture selling and acquisition buying businesses come out of this ahead, and stronger – and with both parties having to deal with and resolve as few surprises as possible. Good negotiations and contractual agreements identify and remove post-signing surprises before they can arise.

From a seller’s perspective, the final package can effectively and profitably include elements that would be retained in-house if simply considered on their own, but where greater value is obtained from them by bundling them into a divestiture package than would be realized by simply holding onto them. The value and due diligence significance of the individual parts of the package are important, but the overall impact and realizable value and profit from assembling and selling the entire package is likely to determine the outcome of any decision making process as to whether to sell or not.

And as a final thought here, a divestiture and acquisition agreement can mark the beginning of a more comprehensive and long-term mutually profitable agreement between two businesses, where they for example, each work with the other in providing resources that are needed but that do not fit into that other’s lean and agile core infrastructure or systems requirements in maintaining and providing its unique value propositions.

Up to here I have only considered the selling and buying of selected parts of a business. I am going to turn in my next series installment to consider the sale of entire businesses, and exit strategies. 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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