Time-tested tenets for maximizing value
In these blogs, we routinely write about our experience supporting the IT side of $11 billion in acquisition activity, specifically post-merger integration. In this entry, we’re going to take a look at the other side of the equation: Divestiture.
This is neither simple, nor simplistic. Divestiture is not “acquisition in reverse.” Spinning off and selling a company or line of business is a complicated matter and an incredibly delicate balancing act. Used properly, IT can facilitate the divestiture, helping the parent company to reap maximum value from the sale. Conversely, overlooking IT’s role can have costly consequences.
There are lots of reasons a company would want to sell a part of itself. A given line of business, product line, or geographical footprint may no longer align with the company’s strategic objectives. A company may have acquired another business for certain key assets, and now wants to spin off the superfluous ones. Or there may simply be a need for cash.
At Ensunet, we don’t get involved in the “Why” of divestiture. But we certainly help with the “How.”
A progressive approach to divestiture
Sadly, most companies perceive IT as a mere cost center, and not a strategic partner. That’s a shame, because IT can play a hugely productive role when it’s time to divest. Forward-looking companies will give IT a seat at the table during the planning phase, rather than taking a reactionary approach and calling in IT after the fact.
Indeed, a properly progressive company will start planning a divestment a year in advance, prior to putting the asset on the market. This will give IT the time required to properly phase the process.
When we say “IT,” in this context, we’re really referring to IT leadership, such as the CIO. We like to liken the CIO’s role to the Chief of Staff in the Oval Office. Their job is to not only know their own job, but all the other leaders’ jobs, as well. They must be multi-lingual, and possess sufficient presentation and influencing skills to communicate to the board and the C-suite. It’s the only way to make sure that IT gets properly integrated into the divestment plan.
IT as the divestment linchpin
If you treat IT as an afterthought during a divestment, you’ll pay for that oversight—dearly. Consider everything you need to understand, from an IT perspective, prior to putting that line of business up for sale, let alone cutting the cord once the deal is consummated:
- What are the different systems at play? If a person in To Be Sold Unit performs, say, 20 different tasks, what systems are they pulling their data from? Where does it reside? Who are they sharing it with?
- How is the data being managed? Where is it stored?
- Where do the analytics pull from, and report to?
- Where are the enterprise systems housed? Are they in different locations? Co-locations? In the cloud?
- What do the vendor relationships look like? Who will stay, and who will go? Will there be any conflicting overlaps? Any departure of vital information?
- What’s the footprint of utilities like phone, email, and networks?
- What’s the IT infrastructure? What does the enterprise architecture look like? How has it been designed over the past several years? Where’s the “as-built” documentation?
- Do you have an up-to-date inventory of business processes and related systems?
- If you were to carve out a given system, will your remaining people still be able to perform their jobs?
Here are two ways to think of the challenge:
The first is what we call “the spaghetti mess.” If you’re trying to fetch the highest premium on the market, only to hear your prospective buyer complain that they have to “unwind this spaghetti”—i.e., perform a gap analysis—to even understand where they’d be before Day One, you’re not going to succeed. Where’s the plan for migrating the data? Who will support cybersecurity and applications during the transition? What’s the decommissioning process for hardware, apps, and software licenses?
The other analogy is simply “surgery.” You want to donate a kidney, without killing the patient. Everything’s interconnected. You’d be remiss to just start whacking around with a scalpel.
The roles of the DMO and the TSA
Progressive sellers will stand up a divestment management office, or DMO, when it’s time to sell. The DMO will reside upstream of IT leadership, managing people, buildings, and systems. The DMO will ask IT questions such as “What will it cost, in people and time, to separate this unit? Where are our process, hardware, and software inventories?”
And IT may well come back with answers such as “We have half a million dollars’ worth of software licenses coming up for renewal in the next six months.” That’s a big factor, when the deal clock is ticking.
While not all divestment deals will feature a DMO, they will all include a TSA. That’s the vital Transition Services Agreement which is negotiated between the seller and the buyer. It will stipulate who supports what, and for how long, during the transition. Many are structured like a public-works contract, with financial penalties for missed deadlines or disruptions. Indeed, it’s the first thing the buying company’s IT team will want to see on Announcement Day: “Where’s the TSA?”
Stranded costs and elastic infrastructure
Given the pressure (carved in stone via the TSA) to turn over the assets cleanly and expeditiously, the last thing you’d want to have, when divesting a line of business, are what are known as “stranded costs.” These are things that you’re contractually obligated to pay for after the divestment has occurred—but that you no longer need. In a word, Ouch.
Here’s an example: Let’s say a company has a signed deal for five years of cloud-based datacenter support. Then along comes the divestiture—and one-fourth of the capacity will no longer be needed. But you can’t renegotiate that cloud-center deal. You’ll still be paying for all five fifths, even when you don’t need them.
How, then, do you avoid these types of scenarios—and costs?
The answer is “elastic infrastructure.”
If you’re a forward-thinking IT leader, you need to factor the very real possibility of future divestiture into all of your current-day planning. You need to take a modular approach. You need to ask yourself: “What if this facility, product, or service were to be sold in the future—and were no longer a part of the core organization?”
Taking that approach can save tons of headaches—and money—in the future.
This is where it can really hurt to be penny-wise and pound-foolish. For example: A sales team may want a new app. The quick-and-dirty way to do it would be to park it atop of the organization’s existing system, to get economies of scale. But, five years from now, if that line of business is getting divested, how can you possibly separate it out? It’s like adding kids to a divorce scenario.
How to get help
We know how to help during divestiture, because we do it. The problem is often threefold, and Ensunet is uniquely positioned, and able, to support all sides of this triangle:
- We help the divesting company to plan and execute its divestment—with more emphasis on “planning” for the forward-looking companies, and more “execution” for those playing catch-up.
- We help the acquiring companies to integrate their purchases once the deal is complete.
- Crucially, during the “gray period” during which the TSA clock is ticking, we support the spun-off-but-not-yet-integrated entity, to keep all systems up and running, and employees productive and happy. (If you’re a buyer, you certainly don’t want any key people to leave, taking their tribal knowledge with them.) The spun-off entity may still “have caught a cold,” from a cybersecurity perspective, so we’ll keep them isolated from the purchasing company until we can ensure that they’re ready to be safely integrated. And our temporary IT support model gives the buyer an IT workforce cushion, too, helping them avoid TSA penalties from the seller.
You can get help, too
As we’d said, divestment is a complicated process, requiring a concept of separation and a roadmap to for execution. We can, and do, help with all phases. Contact Ensunet today for a free, no-obligation consultation.