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What vendors will need to examine as they shed assets

11.03.2009
Companies spent trillions on software and Internet mergers and acquisitions in the post-bubble boom. Some of those acquisitions have fueled growth, geographical expansion and innovation. However, many have fallen short of expectations, taken companies outside of their core focus, or drained resources from more promising lines of business. These assets should be sold, but this is easier said than done.

Carve-outs are tricky. Valuations often rely on pro forma rather than actual results. Planting a "for sale" sign on a line of business can invite a media and analyst frenzy over the health of the parent company and the possibility of a fire sale. Key employees may go to work on their resumes, or lobby to stay with the parent. Many carve-outs involve assets that were purchased during good times for what in hindsight was an inflated price. A divestiture at a lower price today could be interpreted as a tacit admission of failure, or evidence of overreaching.

Executed poorly, a divestiture can be a disaster. Executed well, it can create value.

The market downturn offers a unique opportunity to divest non-core assets. In a down market, analysts are numb to negative news because that is all they hear. Revenues and profits are down already, so why not restructure customer relationships from perpetual to recurring licenses? The result will be an even bigger hit on near-term revenues, but a huge uptick in the net present value of customer contracts. Downsizing is expected, presenting the perfect opportunity to lay off marginal staff. And, most importantly for this discussion, the analysts want to see focus and discipline. What better way to satisfy these criteria than by shedding non-core businesses?

The market has created certain challenges. A business unit will generate less in a trade sale today than it would have a year ago, and it will take longer to close a deal. A low valuation is especially troublesome to a corporate development group that paid a much higher price when they originally bought the asset. However, they probably care more about this issue than anyone else. A review of press coverage on recent divestitures reveals an interesting fact: whether or not financial details were disclosed, there was very little speculation on whether the price was good, or even fair. A well run process will ensure that the sale is at fair market value and reflects what the market will bear.

For example, press coverage on Motorola's sale of the Good Technology division mentions "the end of the company's foray into push services" (PC World). The Wall Street Journal pointed out that the sale netted "far less than the $500 million" that Motorola originally paid for the division, but went on to discuss the benefits of the deal, including an end to litigation between Motorola and Visto.