Deloitte Finds Rise In Firms' Divestitures And Carve-Outs

Two thirds (64%) of executives said their companies are still pursuing carve outs, or divestitures, despite the economy and the credit environment, according to a recent Deloitte survey of 100 executives. Respondents indicated the most important rationales for carve outs

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Two-thirds (64%) of executives said their companies are still pursuing carve-outs, or divestitures, despite the economy and the credit environment, according to a recent Deloitte survey of 100 executives.

Respondents indicated the most important rationales for carve-outs were that an asset was not considered core to the business strategy (66%) or the company needed cash and capital (50%).

In discussing prices sought for divested assets, 83% of survey respondents indicated that strategic buyers typically offer the highest valuations.

Of the executives surveyed, 40% had attempted a carve-out they were unable to complete in the past three years. For those reporting incomplete divestitures, 39% said that they would attempt to divest the same asset again in the next three years.

According to the survey, the most common reasons for not completing a carve-out divestiture were: sellers were unable to obtain the price sought (67%); buyers came back with new, reduced terms (38%); sellers could not find a buyer (33%); and, buyers were unable to secure funding (32%).

“In light of a challenging economic environment, carve-outs remain an important means for companies to focus business strategies and strengthen balance sheets,” says Bob Coury, national managing director, Deloitte Corporate Finance LLC.

“The recession has pushed more firms into financial situations where they may be looking to divest operations to raise additional capital. Although companies might prefer to wait until market conditions improve, many don’t have that luxury. When companies need to divest operations quickly, they typically trade premium valuations for the certainty of getting a deal done.”

“The broad consensus among the executives surveyed is that strategic buyers — both domestic and foreign — show the greatest interest, offer the highest valuations and complete a majority of carve-out transactions,” continues Coury.

“Driving this disparity is the fact that strategic buyers don’t always face the same challenges encountered by financial buyers. While it can often be easier for strategic buyers to integrate carve-outs into their existing infrastructure, financial buyers may lack the appropriate operational infrastructure, management teams and industry experience making integrations more challenging. As a result, financial buyers often offer lower bids to account for significant investments needed on the back-end of a carve-out acquisition.”

“Initial carve-out attempts are not always successful. Quite often, sellers move hastily, without researching the market or — more importantly — properly preparing the asset for a sale,” says Andrew Wilson, national managing partner, Divestiture Services, Deloitte & Touche LLP.

“Lack of thorough preparation can cause sellers to develop unrealistic value expectations based on limited financial and market data. This typically results in the delay of a transaction, a sale at a reduced valuation or an unsuccessful carve-out divestiture.”

L.D.

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