Why are Megadeal divestitures increasingly common?

Megadeals are increasing in popularity across multiple industries and commonly involve significant divestitures to complete the Megadeal. In 2016, the median deal value increased 20% compared to 2015. While the overall transaction volume decreased in 2016, the size of deals continued to increase in value. These large deals have resulted in associated divestitures. Divesting business assets is common during a Megadeal to gain regulatory approval, raise capital, or actively manage the corporate portfolio.

Regulatory Approval

The most common business case for divesting assets during a Megadeal is to gain regulatory approval. Anti-competitive concerns are alleviated through a structural, conduct, or hybrid remedy.

• Structural remedies involve seeking a purchaser that holds the capability to be an effective, long-term competitor capable of preserving market competition.
• Conduct remedies are more challenging than structural remedies because they require identifying a specific competitive concern unique to the transaction. A customized solution that is enforceable must be implemented to restrain anti-competitive behavior and maintain market competition. Conduct resolutions come in many forms: firewall, nondiscrimination, mandatory licensing, transparency, anti-retaliation provisions, and prohibitions on anti-competitive contracting practices.
• Hybrid remedies may be the most effective remedy and are composed of structural and conduct components. Hybrid remedies are best suited to a merger that involves multiple markets where the competitive landscape varies and a unique resolution is required to maintain market competition.

Raise Capital

A less common goal in Megadeal divestment rationale is to raise capital prior to closing the larger transaction. Corporate objectives in raising capital include deploying capital to the acquisition purchase, restructuring capital structure, and accelerating post-close integration and transformation initiatives.

• Intuitively, raising capital prior to an acquisition creates additional funding liquidity and reduces acquisition capital requirements.
• Restructuring the capital structure by divesting assets enables the acquirer to improve its balance sheet and capitalization prior to a capital intense transaction.
• Accelerating post-close integration and transformation initiatives require large integration budgets to capture deal value and realize the deal rationale.

The increased capital from divestments can be deployed to funding integration and consolidated transformation initiatives.

Strategic Corporate Portfolio Management

A strategic corporate portfolio management best practice should include a future state re-evaluation to a Megadeal. Understanding the deal rationale, the acquirer should assess its portfolio to align business units with “best owner” strategies, hone post-merger business strategy, and reaffirm deal rationale.

• A “best owner” of a business unit evaluates assets for optimal ownership that maximize shareholder value. This may include divesting business units proactively when most businesses divest reactively under market pressure.
• To hone most-merger business strategy, acquirers divest non-core assets to keep pace with business needs as it matures and the competitive landscape evolves. Studies indicate this active corporate portfolio management drive increased shareholder returns.
• Active corporate portfolio management is a useful tool to reaffirm the Megadeal rationale. Divesting non-core business units sets clear leadership to the corporate strategy and promotes management teams to realize deal value by effectively and efficiently aligning key assets on integration efforts.

Digesting a Megadeal requires a high degree of leadership alignment and long-term strategic focus.

Determination

The increased Megadeal activity affects most industries and cannot be ignored. Megadeals’ requirement for regulatory approval, capital, or strategic corporate portfolio management necessitate divestitures. In the most common scenario, regulatory approval, divestitures can become a Megadeal breaker and must be a priority in order to realize the deal value. Raising capital and strategic corporate portfolio management are additional divestiture rationale considerations that drive Megadeal success factors.