Corporate Dealmaking: Increasing Shareholder Value Through Trade Sales, Spinoffs and Carve-outs

Corporate divestitures are being fueled by everything from new healthcare legislation and government regulations that came in the aftermath of the financial collapse to changes in technologies, distribution channels and even macroeconomics.

A panel of experts drew that conclusion at a recent roundtable, "Corporate Dealmaking: Increasing Shareholder Value Through Trade Sales, Spinoffs and Carve-outs." The Deal and virtual data room Intralinks Dealspace co-produced the Webcast.

Panelists included Brian Buchert, director of corporate strategy and M&A at Church and Dwight (CHD), the consumer and chemical products company; Kenneth Meyers, vice president of M&A at Siemens Corp (SI)., the global electronics giant; and Roger Marinzoli, senior managing director of M&A and corporate development at TIAA-Cref, the huge financial services and life insurance concern. Ben Collins, Intralinks' director of strategy and product marketing, served as moderator.
"You have seen a lot of divestitures, carve-outs and spinoffs come out of the process, coming out of the legislative changes out of 2008, with Dodd-Frank and the Volcker Rule," Marinzoli said.
"Regulatory changes in the healthcare industry have had an impact on profitability and business models and sales cycles," Meyers added. "But also technological changes and the emergence of economies in other parts of the world have driven some strategies."

Valuation is another big motivator, Marinzoli said. For a company that has multiple business lines, activists in particular "will simply ask [whether] the sum of the parts is really being valued correctly," he said. "If it's not, management, the board, advisers or shareholders could say 'if you liberate value, if you unlock value and you spin off something back to shareholders in a tax-free spinoff you will create more value.

Instead of divesting a potentially valuable asset completely, establishing a market benchmark by floating a piece of the asset is another way to get a valuation lift, Marinzoli said.

While the current environment invites this kind of dealmaking, a well-honed sense of strategic direction is the biggest incentive for deciding what is core and should be kept and what should be sold, the panelists agreed.

"Selling something is frequently not an easy decision, sometimes a very painful decision, but we try to apply a fairly strict set of criteria," Meyers explained. He listed a number of possibilities:

• Perhaps a company or division doesn't fit Siemens' financial objectives or doesn't generate "an attractive return on capital anymore."
• Maybe a business line has revenue and earnings that are overly volatile.  
• Possibly a business isn't "generating synergies within the larger portfolio of our businesses."
• Or a company might be "in our portfolio where we're just simply not the best owner."

For Church and Dwight, Buchert added, "When we look at divestitures, it's usually in the context of an underperforming brand or operational complexities." He said that Church and Dwight, best known for its Arm & Hammer products, analyzes the amount of time employees must spend on a particular business or brand versus its benefit to the corporation as a whole. "A brand that provides 5% of the sales yet your team is spending 25% of their time on it is not a very good use of your activity."

Sometimes, divestitures come as an integral part of a larger acquisition. Those divestitures may be voluntary or mandated by anti-trust regulators.

As an example of a planned divestiture, Buchert cited his company's purchase in 2008 of the oral analgesic brand Orajel. The acquisition, he explained, "came with five other smaller brands that we affectionately called the 'Five Plagues,' brands that included remedies for boils and earaches. "We went into it knowing we didn't want to own those small brands." So, Church and Dwight structured the deal in such a way that it could quickly package and sell them off.

Sometimes, antitrust issues mandate divestitures, which makes it extremely difficult for the seller to drive value from the transaction. Buchert described a deal in which Church and Dwight acquired Spinbrush from Procter & Gamble (PG) when P&G was acquiring Gillette. "They were making a $50 billion deal. What was holding it up was a little, battery-powered toothbrush brand," Buchert said, adding that his company took advantage of the situation and garnered strong terms on the acquisition "because we were one of the few trade buyers and that's where they wanted to go. We were also friendly."

Regulatory changes also have spurred divestitures. Marinzoli cited Dodd-Frank and financial services. The Volker Rule restricts banks from owning such operations as commodities and proprietary trading platforms and private equity. Insurance companies have also been exiting their banking operations because of new capital requirements and regulations, Marinzoli explained. And, he added, large banking institutions have been selling off asset management firms, "that had a lot of intangible value" but lacked adequate tangible value and were dragging down the overall capital structure.

For sellers, success isn't merely offloading a company for the best price, but finding a home in which the company can thrive, the panelists stressed. Meyers cited Siemens' sale of the Osram lighting business as motivated by the belief that it would be a stronger competitor if divested. "We want to make sure that any company that leaves the Siemens portfolio is going to be able to be sustainable," Meyers said. He added that his company may even reject the highest bid at auction if it believes another owner would do a better job of ensuring long-term viability, driving growth, and serving both the customers and the workforce.

In the case of Siemens, ensuring sustainability can include the use of its brand name in a sale. "We have accommodated that in a number of ways," Meyers said, adding that those ways usually involve a licensing agreement.

"Brand's the key. It's the trademark. It's the history. It's the advertising behind it," Buchert stressed, when establishing value. Licensing the Arm & Hammer brand increases the value of a divestiture, but Church and Dwight must be cautious about any agreement, he said. "We have to make a determination about the buyer and whether they're a good owner of that license," he said, adding that in a couple of cases, the brand name was licensed to buyers for "five years or so."

When it comes to preferred buyers and the role of private equity, the panelists were split. Marinzoli said he likes working with private equity buyers for a couple of reasons: Due diligence is quicker and less laborious than with strategic buyers. And, because PE deals are "financially engineered," pricing can be easier to predict. "In a low-cost environment for financing, like we've had over the last several years, it makes it doubly difficult to predict where a strategic ... is going to come out," Marinzoli said.

Buchert, however, said he prefers strategic buyers. He especially avoids PE firms that "don't have infrastructure to run" the asset but "have sold effectively to a private equity firm in the past who had a small portfolio company [and] who was able to add these brands on top of it."

To illustrate how it all comes together, Meyers cited Siemens' hearing aid business. While Siemens established a highly competitive, technologically advanced and well-known brand, its hearing aids were being sold through very fragmented distribution channels to retail customers who often would pay in cash, all factors contrary to Siemens' direction, which is institutional and corporate. "It just didn't make sense in our portfolio," Meyers said. "We sold it to a private equity buyer who will maintain it as one of the world's foremost hearing aid companies."

In most divestiture cases, advisers are necessary, the panelists agreed. (The exception, said Meyers, is with a family-owned, small entrepreneurial business where bringing in a Wall Street adviser
"can sometimes change the dynamics.")

Even though TIAA-Cref is private, if a transaction is material, outside advisers are called in, Marinzoli said. "The board wants to have that fairness opinion," he said, adding that having someone from the outside come in "makes a lot of sense from a process perspective" as well, even if there's a great internal corporate development team.

"When we're selling a business, we're carving something out, we always will use an adviser mainly because we know how hard it is," Buchert added. "It's much harder to selling something than to buy something, quite honestly."

This article is a transcript of a round table discussion, presented by Intralinks and edited by The Deal.

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