Getting more value from divestments (part 3)

People, regulation and tax are crucial in carve-outs

People, regulation and tax are crucial in carve-outs
  • Report
  • 15 Sep 2023

Divestments, also known as carve-outs or disposals of business units, are strategic decisions that companies (may) make to optimise their portfolio and create value. Companies decide to part ways with activities that are not core to the business or divest parts that no longer fit within the business strategy. Divestments offer several benefits, but organisations need to be alert to key areas of concern, argue PwC experts Machiel Visser and Aishwarya Ramje. With a holistic approach to people, rules and tax, a carve-out has the greatest chance of success.

Four benefits of divestments  

A divestment can have four benefits for companies:

  • Freeing up capital  
  • Create renewed focus  
  • Reduce complexity  
  • Improve financial performance

By divesting non-core activities, you can free up capital that can be invested in core activities or new growth opportunities. Divestment allows you to focus on your core activities, allowing you to operate more efficiently and strengthen your competitive position. It also reduces complexity within your organisation and makes it easier to achieve operational goals. Ultimately, carve-outs can also lead to better financial performance, if you manage to reduce costs and optimise profitability.

Three actions to maximise the value of divestments   

While there is no universal approach or ready-made formula for divestments, PwC's research into the psychology behind the decision-making process and the value that divestments create revealed three key actions to maximise the power of portfolio renewal and the value of divestments.

Proactive portfolio management  

The quality and thoroughness of the portfolio review process vary considerably among companies. A proactive orientation shows a two and a half times increase in the chances of delivering a positive return to shareholders. For public companies, there’s a five times increase in the likelihood of a positive return. A proactive portfolio review is one in which thorough analyses are performed using financial and nonfinancial data, as well as analyses of current and future competitive environments.

Divestment in the corporate DNA  

Examining companies where divestment is in the DNA, so to speak - including the willingness to divest a business unit regardless of whether the deal is eventually executed - provides interesting insights. Firms that are more willing to divest regularly engage in thorough portfolio analysis, have reinvestment plans for the resulting capital, and have clear board commitment.  

The likelihood of a company to both consider divestitures in their decision-making process and ultimately decide to divest are nearly two-and-a-half times greater for companies that have a positive attitude towards divestitures versus companies that are reluctant to consider divestitures. 

Speed of execution  

Speed is important at every stage of the process. If you shorten the period between the decision to divest and closing the deal, you increase the likelihood of a positive total return for your shareholders. For example, if the time between announcement and execution was less than twelve months, the seller achieved a greater excess return compared to industry peers. That return was even greater if the process took less than six months. If the sale took longer than twelve months, the seller generally performed worse than industry peers. This is not to say that a divestment should be rushed. Rather, speedy divestments are often a good indication that a company is systematic about timely and continuous analysis of business units.   

People, regulation and tax

Your company's management and board must be aware of its own biases and those of others, and foster a culture of divestment readiness. Setting up structured portfolio review processes, obtaining the right data and analysis, and involving the management and board in decision-making are key steps in this process. In addition, early attention to functional areas such as people, regulation and tax is crucial for the successful implementation of divestment.  

People are the essence of any business and are vital during the divestment process. It is important to effectively involve all stakeholders - both internal and external - and communicate clearly with them. Considering employees of the relevant business units, trade unions, clients, suppliers and investors.

If you ensure clear and transparent communication, you can reduce uncertainty and increase confidence in the divestment process. Notifying your 'shop floor' very late can create bad blood. From people perspective, following remain key areas of focus on divestitures:

·     Separation of HR function and technology

·     Organisation design and realignment

·     Cross border and legal considerations

·     Employee retention and engagement

In our experience, complexity and level of effort for these activities is usually underestimated and left late in divestiture processes.

Employees constitute one of the largest operating expenses of a company. The ability for HR to accelerate closing, manage costs and secure employee retention hinges on close collaboration with the finance, tax, legal, IT and corporate development department.

A sustainable human capital financial model starts with understanding the key components that make up employee-related cost, including transfer of pension liabilities and assets, deal bonus triggers, changes to benefit run-rate cost due to separation and changes to the respective HR operating models of the divested business and remaining company along with underlying technology & tools that support the organisation.

As with any transaction, there are many legal issues to be carefully considered in a divestment. Since the business unit will no longer be part of the seller, different issues come into play than in regular M&A transactions. For example, what licences do the divested business units need to operate independently? Does a new works council need to be installed? These are ring-fenced issues that are fairly straight-forward to address. That is different when it comes to sustainability as that crosses over the entire value chain of any business. New regulations such as CSRD.

help businesses to articulate how the company is implementing sustainability as well as its objectives regarding sustainability. It is worthwhile that a divested business is CSRD-ready, but it will come with challenges. The data requirements are comprehensive and the separation will add a layer of complexity to effectively collect the required data. That being said, sustainability is a key value driver and therefore potential buyers will closely look at the issue. Though we have observed that a lack of data can limit investors’ ability to attribute value specifically to ESG-related factors, CSRD may help to bridge this data gap.

Tax implications are an important consideration when planning and executing your divestment transactions. In many cases, the focus is on the possible tax implications of the transaction itself - i.e., whether the disposal and sale is taxable/not taxable - and the operational challenges of setting up the tax function so that it can continue to meet reporting and tax return obligations during and after the transaction.

The unique thing about carve-outs, however, is that new businesses are born. With that also comes the opportunity to optimise the new organisation and processes not only commercially and operationally, but also fiscally. Where the functions, assets and risks are located will determine the transfer pricing model you need to apply to align with the business model and ensure fiscal robustness. Early understanding of the future business model and the associated transfer pricing model is critical to understanding where to position assets, people and decision-making and how this affects legal separation. This is why it is imperative to model the tax implications in advance and ensure you can optimise business decisions. 

Often the focus is on the transaction - 'getting it done' - but once the organisation is in place, it is difficult to 'shift' any more fiscally. Attention to the tax aspects of the new company before 'day one' is therefore very important. It is precisely a situation in which the new and old companies are still operating as one, which makes it easier to get the necessary details on the table and establish a well-founded fiscal (operational) structure. 

In doing so, also check whether the EBITDA of the future company is in sync with the envisaged financing structure. Perhaps it is advisable to centralise certain functions? Are special regimes available for the new company? This not only promotes the robustness of the new venture, but also the value and execution speed of the transaction. 

Collaboration between the commercial, operational and tax teams is essential because value is not realised standalone. Through careful tax planning and tax compliance, you can maximise the value of your transaction and avoid unpleasant surprises in the future.  


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Contact us

Machiel Visser

Machiel Visser

Senior Director, PwC Netherlands

Tel: +31 (0)68 252 82 39

Aishwarya Ramje

Aishwarya Ramje

Manager, PwC Netherlands

Tel: +31 (0)61 890 99 38

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