divesting in turbulent times aus findings

8/6/2019 Divesting in Turbulent Times Aus Findings

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Divesting inturbulent times

Achieving value in a buyers marketAustralian fndings highlights

April 2009


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3 Divesting in turbulent times Achieving value in a buyers market

Contents1 Foreword

2 Survey highlights

3 Strategy

8 Preparation

12 Execution

16 Unprecedented times for business

17 10 Golden rules

18 How Ernst & Young can help you

20 Contacts


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1Divesting in turbulent times Achieving value in a buyers market

ForewordErnst & Young conducted the first ever global survey of divestmentintentions at the end of 2008, examining the steps required to plan,execute and complete a successful sale in turbulent times. Inconjunction with the Economist Intelligence Unit, we interviewed360 senior vice presidents and C-suite executives at companies withrevenues of more than US$1 billion.This document is intended to supplement the global perspective and aims to exploremore closely the local results of the survey, in particular highlighting the differencesthat exist in divestment strategy from a global to a local market context. 86% ofAustralian respondents to the survey were publicly listed and, in the main, came fromthe nancial services, consumer goods and telecoms industries.

Our global survey results showed that the complexity of the sales process hasincreased signi cantly in the current climate both in terms of reassessing what isto be sold and then how it should be marketed.

Divesting will require creativityDivesting companies in this new environment will require creativity. Innovation willinvolve deal structures to cover equity, debt, management and counterpartyarrangements including vendor nance. This will allow you to explore where your priceexpectations and those of buyers can align, at a time when it is hard to place ade nitive value on many businesses.

Preparation must be customisedMoreover, your preparation will need far more rigour. You will have to customise yourfor sale offering for each prospective bidder.

Execution will be harderDivestments will not yield the value they did when the economy was expandingsteadily. Value will be more elusive. This is now a buyers market not a sellers.Your best response to that shift is to focus intensely on your buyers requirementswhen preparing your divestment for market.

I would like to take this opportunity to thank those individuals who took the time totalk to Ernst & Young about their companys divestment strategy; their insight wasinvaluable in preparing this analysis.

We trust you will nd the survey of interest and that it helps you achieve success inyour future divestments.

Stephen Lomas

Oceania Sell SideLeader

TransactionAdvisory Services

There is no intuition invaluing businesses.Extracting value fromdivestments is all about hardwork. If you and your teamput in the hard work, thenthings become clearer. Youhave to work hard and runall options through to theend before making astrategic decision.Defence contracting and infrastructureservices company


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Survey highlightsIn todays volatile environment, many companiesare considering divestments; 52% of Australianrespondents are more likely to consider adivestment now than compared to 18 months ago.Australian respondents to the survey also indicatedthey are more likely to consider alternatives todivesting 100% of their business for cash, withsellers needing to work far more closely with buyersto create viable deal and financing structures.

For those badly affected by the economic downturn,divestments may be a necessity. Those with strong balancesheets will have opportunities to acquire - at potentiallyattractive prices businesses that may not usually cometo market.

As the results of our survey show, successful divestments havenever been more challenging. Key themes owing from theAustralian survey are:

Economic distress drives transaction activityWhile M&A volumes are down from their peak, the surveyreveals how the credit crisis is expected to drive transactionactivity. Perhaps surprisingly, more than half of Australianrespondents report current economic and nancial conditionsmake them more likely to consider divestments. Many ofthem are doing so to raise cash either for defensive reasonsor to redeploy capital and reinvest in those businesses thatare seen as core.

Buyers with cash have a rare opportunity to acquirebusinesses that would not typically be sold, and for valuationsthat would not have been possible in recent years.

Preparation increases valueThe survey highlights the need for early, more detailed andtailored preparation.

Looking back at divestments completed in more buoyanttimes, only 20% of Australian respondents were satis ed withtheir divestment performance, compared to 36% of globalrespondents. Australian respondents believed that earlier andmore detailed planning would have made the difference. Intodays more challenging market, planning will become morecritical than ever.

Sellers and buyers will become moreinnovative

With acquisition funding scarce and private equity buyerswaiting for the market to stabilise, sellers will need to adoptmore creative structures, including joint ventures andpartial sales.

Buyers will come from closer to homeFrom a global perspective, emerging market headquarteredcompanies will account for an increasing share of acquisitions

in the next two years. Conversely, in Australia the consensusfrom survey respondents was that domestic buyers willaccount for the majority of acquirers in the next two years,with limited in uence from inbound emerging market buyers.Mergers and acquisition activity since the survey indicates amuch higher level of interest in Australian assets fromoverseas buyers than respondents expected.

Australian respondents did not feel Sovereign Wealth Fundshad a signi cant role to play as well as expecting minimalprivate equity activity despite the amount of capital that mostprivate equity funds currently have available.

Divesting is an integral part of our strategy. We are focused on divesting non-performingassets, or lesser performing assets that may still be making a pro t, to leverage many ofthe pro table opportunities available as a result of the current economic climate. If thereare no suitable or viable opportunities in the market at a point in time, divestment is still anintegral part of our strategy. We continually look to restore cash to the balance sheet,placing us in an optimal position for when an appropriate investment option presents

itself.Logistics company


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StrategySuccessful sellers devote more resources and timeto prepare, execute and evaluate

In todays uncertain environment, proactivedivestments have become a strategic necessity formany companies. Liquidity and solvency needs aredriving companies to sell noncore and under-performing businesses, pursuing a wide range ofdeal structures and financing methods. New andfewer buyers highlight the need for foresight and

creativity making rigourous portfolio management,deal preparation and execution critical.

Why divest?Despite the challenging economic conditions, organisationshavent abandoned strategic considerations around divestment.Globally, strategic t was the most important driver fordivestments. It was a similar story in Australia with 77% citingstrategic t as the key determining factor. In addition:

62% of respondents indicated that for a business to belongin the portfolio it had to complement other aspects of

their business46% determined the retention of a business in their portfoliothrough nancial considerations, i.e., was the business animportant generator of revenue, pro t and/or cash ow?

23% indicated that choosing to divest a business in theirportfolio would be dependent on whether someone would paymore than the current owner thought it was worth. This maysuggest that maximising shareholder value was not alwaysconsidered in divestment decision-making criteria

Globally, 56% of respondents cited the need to focus on thecore business as the most important factor to consider whenplanning a divestment. Australian respondents were alignedwith this view, with 50% acknowledging the importance of focuson core business.

Interestingly, 34% of Australian respondents saw restoring cashto the balance sheet as key while for global respondents thispercentage was much lower at 12%. Were seeing a massiverebalancing of debt and equity, with many companies eitherattempting to raise equity via a rights issue or increasinglylooking to sell a non-core division to reduce debt, says GraemeBrowning, Partner, Transaction Advisory Services.

82%

62%

58%

Strategically important

Important revenue, prot and/orcash ow generator

Complements otheraspects of our business

Whether someone would pay usmore than the business is worth to us

17%

0 20% 40% 60% 80% 100%

77%

46%

62%

Strategically important

Important revenue, prot and/orcash ow generator

Complements otheraspects of our business

Whether someone would pay usmore than the business is worth to us 23%

0 20% 40% 60% 80% 100%

What criteria do you use to determine whether a business belongsin your portfolio? Please select all that apply

Global

Australia


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We raised cash for acquisition purposes notto pay down debt and so far the market hasreacted very positively to this form ofcapital raising when compared to thosecompanies that had speci cally raisedequity simply to pay down debt.Mining company

Portfolio management is the first stepExperienced sellers have a process for rigourous portfolioreview and management; 67% of Australian respondentsregularly examine every business in their portfolios to see ifthey should continue to retain them. Globally, this was a similarpercentage at 60%.

Managers need to articulate why each business belongs in theportfolio and lay out clear performance metrics so investors andlenders have suf cient visibility into strategy and operations.

We apply comprehensive criteria to ensurewe have the appropriate mix of businesseswithin our portfolio. We are focused onbuilding our core capabilities and it is crucialthat prospective purchases complement,rather than distract from, our currentoperations.Biopharmaceutical company

We regularly examine each business inour portfolio to determine whetherwe should own it.

Please indicate whether you agree or disagreewith the following statement

Australia

0 20% 40% 60% 80% 100%

17% 50% 25% 8%0%

Strongly agree Agree

Disagree Strongly disagree

Neither agree nor disagree

56%

21%

12%

8%

Increasing focus on our core business

Disposing of non-performing assets

Restoring cash to the balance sheet

Funding new investments

Paying down debt

Increasing focus on our core business

Disposing of non-performing assets

Restoring cash to the balance sheet

Funding new investments

Paying down debt

3%

8%

34%

50%

0%

8%

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

Australia

Which is the most important factor you consider in planninga divestiture?

Global


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Supporting decision-making withperformance metricsWhile collecting detailed performance metrics is important bothfor portfolio management and transaction decision-making, thisis an area often overlooked. The survey shows that manycompanies lack suf cient data to make informed divestmentdecisions.

The absence of readily available comprehensive data couldimpair your ability to make informed decisions about whatand when to sell and at what price. A lack of insightful datamay also limit your ability to react to an unplanned approach oran immediate need to respond to a situation. In the minds ofmany sellers the information needed to run a business isadequate or the same as the information needed to sell abusiness; this is incorrect. Measures of revenue, margin andadjusted pro tability need to be available and if they are not,the ability to properly consider the value of the business both toyou and to a possible buyer may be impacted.

Of the Australian respondents who use some form of return oninvested capital (ROIC) nancial metric, almost one thirdthought they lacked suf cient critical information to make quickand informed decisions on portfolio assets; for globalrespondents this number dropped to 20%. A further third ofAustralian respondents indicated they did not use ROIC as a

nancial metric for portfolio management; this compared with16% of global respondents. The majority of global respondents 65% - report that they have the necessary pro t and loss andbalance sheet information for each business; the gure forAustralian respondents was much lower at 38%.

This lower percentage for Australian respondents could beimpacted by those from overseas parent companies where thelevel of appropriate nancial information is not immediatelyavailable at a local level. However, as the survey does show ahigh correlation between those that use ROIC and those thatachieve value in their divestment, tracking information tobusiness unit level on a continual basis - and therefore beingable to validate the business units cost of capital - could prove aseller advantage.

Developing and implementing consistentapproaches to measuring performance is ahigh priority as it drives decision makingaround divestments.Logistics company

5%

11%

3%

16%

65%

We cannot assemble the necessaryinformation at this time

We have the P&L information but donot have balance sheet information

by business

We do not use ROIC as anancial metric)

We have the necessary P&L andbalance sheet information for

each business

We have the necessary P&L andbalance sheet information for

each business

17%

8%

15%

8%

We cannot assemble the necessaryinformation at this time

We do not use ROIC as anancial metric)

We have the P&L information but donot have balance sheet information

by businessWe have balance sheet information

but do not have P&L information (eg. Cash ow)

We have balance sheet informationbut do not have P&L information

(eg. Cash ow)

17%

31%

38%

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

Australia

Which statement best characterises your ability to assemble thenecessary ROIC* information for each portfolio business?

Global


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When should you sell?One of the interesting aspects of the survey was the highnumber of respondents who believed they had failed to bringtheir business to market at the best time.

37% indicated they occasionally brought their divestment tomarket at the best time to maximise value

27% considered that divestments were usually brought tomarket at the best time

18% of respondents rarely brought their divestment to

market at the best time to maximise valueAn equal percentage (18%) cited they never brought theirdivestments to market at the right time to maximise value

None of our respondents thought they always got the timingright in bringing divestments to market

The Australian survey results indicate some marked differencesto those results at global level. Almost 80% of globalrespondents felt positive about their timing on bringingdivestments to market; this dropped to 64% for Australianrespondents. Australian respondents also indicated a muchhigher propensity to never or rarely bring divestments tomarket at the right time 36% - compared to 22% from ourglobal respondents. This higher percentage cited by Australianrespondents could link to the lack of available comprehensivedata; dif culty in assessing aspects of your business couldimpede your decision-making ability around market timing.

Selling optionsClearly, selling a business in todays environment requiresinnovative thinking. At the time of the survey, 92% ofAustralian respondents had, when considering their mostrecent divestment, divested 100% of a chosen business to athird party and only 8% considered placing the business or assetinto a joint venture. However, when asked whether the impactof the current nancial and economic developments over thepast 18 months had made them more likely to consider multipletransaction types (including third party sales, spin-offs and jointventures) for a divestment, 50% of respondents agreed that itwould. A similar level of global respondents (48%) also agreedwith this statement.

As the pool of possible buyers becomes scarce in the Australianmarket, companies may increasingly look for potential investorsto take a share of the asset or enter into a joint venturearrangement instead as we are seeing with Rio Tintosproposed deal with Chinalco and Ascianos currentmonetisation program.

There is likely to be a need to consider a range of nancingoptions, including vendor nance, partial equity sales, deferredsales or asset swaps. While the majority of divestments inAustralia will continue to be 100% cash sales, the surveyindicates that more companies will be creative in nding ways toretain some of the value in stronger assets including,particularly in the shorter term, joint ventures, partial sales anddemergers, says Stephen Lomas. If you can take more time,it pays to evaluate multiple divestment options. Having a rangeof options gives you the best chance of closing a sale.

3%

15%

46%

33%

Never brought them to marketat the best time to maximise value

Rarely brought them to marketat the best time to maximise value

Usually brought them to marketat the best time

Always brought them to marketat the best time 3%

18%

18%

37%

Occasionally brought them to marketat the best time to maximise value

Never brought them to marketat the best time to maximise value

Rarely brought them to marketat the best time to maximise value

Usually brought them to marketat the best time

Always brought them to marketat the best time

Occasionally brought them to marketat the best time to maximise value

0%

27%

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

Which statement best characterises your timing in bringingdivestitures to market?

Global

Australia

25% 25% 42%8%0%

8% 42% 25% 17% 8%

The nancial and economic developments ofthe past 18 months have made us more likely

to consider a divestment

The nancial and economic developments ofthe past 18 months have made us more likleyto simultaneously pursue multiple transaction

types (third-party sale, spin-off etc) fora divestment

The nancial and economic developments ofthe past 18 months have made us more likely

to consider a divestment

The nancial and economic developments ofthe past 18 months have made us more likleyto simultaneously pursue multiple transaction

types (third-party sale, spin-off etc) fora divestment

Global

Australia

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

22% 30% 28% 17% 3%

10% 38% 37% 13% 2%

Strongly agree Agree

Disagree Strongly disagree

Neither agree nor disagree


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A buyers marketExecution risk is considerably higher in the current market, withfewer buyers, less capital and uncertainty around valuationscreating an increased risk of failure. Right now, the biggestexecution risk is the ability to get bidders to the table and keepthem there.

The balance of power within transactions is changing; thereduced number of potential purchasers means buyers will beable to demand more information throughout the entire processand have greater power in managing the sale process timetable.

In the dif cult economic climate, buyers are more interested incurrent trading information than gures from three to sixmonths ago. Vendors will need to meet their demands forcurrent information to keep con dence up and keep the valuestory going. Sellers need to support their buyers as far aspossible by tailoring their preparation to the needs of individualbuyers. Financial due diligence alone is no longer suf cient; sellside preparation needs to be broader, building the completestory for buyers including tax, commercial, human resources,technology, operational, legal and separation issues. At thesame time, vendors need to leave options open and be exiblein their approach, adapting as buyers learn about the business.The key will be to properly understand your likely buyers andwhat is driving them to consider the acquisition so you canprovide all the information they need. Our experience in NewZealand corroborates the view that comprehensive informationto buyers is critical in managing both buyer expectations and

nanciers also, says Andrew Taylor, Partner, TransactionAdvisory Services.

The current turbulent economic climatehas meant that prospective buyers arerequesting substantially more nancial and

legal documentation, which has blown outour lead time.Biopharmaceutical company

Buyers will come from closer to homeWhile some are delaying making divestments at a time whenvaluations are uncertain, companies with strong balance sheetssee todays economic conditions as likely to provide exceptionalopportunities to pursue acquisitions of healthy businesses.

In the last two years, buyers of Australian business assets havebeen spread among a variety of strategic buyers domestic,overseas developed and overseas emerging markets. Privateequity has also had a role to play. In the next two years however,survey respondents expect a shift in the buyer demographic.

82% of survey respondents thought future buyers would bedomestic strategic buyers

9% indicated that private equity would be a buyer, but withless buying power given limited access to debt

9% cited overseas emerging market buyers would have a roleto play

Interestingly, the global perspective favoured greater in uencefrom emerging market buyers with a sharp fall in the in uencefrom domestic buyers.

In our view the ndings from the Australian respondents partlyre ects the timing of the survey when overseas economies

were believed to be in a much worse state than the Australianeconomy. This possibly lead respondents to conclude thatoverseas buyers were less likely to be looking for acquisitions inAustralia. In the current market we would expect to see a higherproportion of overseas buyers, particularly from emergingmarkets in this region.

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

44%

11%

6%

28%

Domestic strategic buyer

Overseas strategic buyer(developed country)

Private equity

Sovereign wealth fund 11%

82%

0%

0%

9%

... next two years?

Overseas strategic buyer(emerging market)

9%

Who were the main buyers of your companys assets in the...

Australia

... last two years?


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Preparation

Better preparation improves the odds

Being well prepared for a transaction is no longerstraightforward. Sellers need to consider all of theirdivestment options, as well as the trade off betweentime and value. Preparation needs to focus far moreon what the buyer wants. This will heighten thechance of success and improve your negotiatingposition at a time when there is much at stake.

Understanding the buyerDivesting in a buyers market requires far greater focus on thecharacteristics of the potential buyers and their perspectivethan was previously the case. Thorough and customisedpreparation improves the odds of a successful divestment not

just in terms of negotiating the best terms, but in getting thedeal done at all.

When asked what value they thought buyers would place onaspects of preparation for a divestment:

Close to 70% of respondents saw clear and realistic forecastsas a valuable component of preparation

58% cited an experienced management team as valuable tothe preparation process

50% valued a well-supported description of potential synergies

42% indicated that an ef cient tax structure was avalue-add component

40% cited a well-documented carve-out or stand-alone plan

17% considered a due diligence report prepared by the selleras adding value to the process

You can also expect prospective buyers to take time in perusingyour asset. Gone are the days when you can sell an assetwithin three months, says Jo Barker, Partner, TransactionAdvisory Services. Any buyer considering acquiring yourbusiness will be all over it so you need to prepare well, prepareearly and prepare for the needs of different buyers.

Trade buyers often require more targeted preparation thanprivate equity. A private equity rm is typically a pure nancialbuyer often with limited synergy opportunities; whereas,synergies form the primary motivation and value driver for thetrade buyer. So, for a corporate, you have to articulate thesynergies and show how the asset aligns with the buyersstrategy. Thats the only way youll make trade buyerscomfortable in this highly risk-averse market, saysGraeme Browning.

Clear and realistic forecasts are obviouslyhigh value to buyers when approaching anytransaction. However the current marketturbulence has made forecasting extremelydif cult to execute and substantiate.Logistics company

Efcient tax structure

Well-supported description ofpotential synergies

Clear and realistic forecasts

Experienced management team

Well-documented carve-out stand-alone plan

Due diligence report prepared by seller

What value do you think buyers would place on the followingaspects of preparation for a divestiture?

Australia

High Medium Low

0 20% 40% 60% 80% 100%

33%25%

50%

42%

42% 8%

67% 33% 0%

34%58% 8%

40% 50% 10%

17% 66% 17%


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Outlining improvementsAnalysis of the ndings from Australian respondents showscompanies are divided on the best practice approach topreparing an asset for divestment.

One third of respondents divest the business as it is, withoutmaking improvements

A further third identify and document potential improvementsfor bidders

The nal third of respondents implement improvements

before beginning the divestment processThe majority of respondents to the global survey indicated thatthey divest the business as it is without making anyimprovements even though, on further analysis of globalresults, there appears to be a strong correlation betweenidentifying and documenting potential improvements andachieving value. In Australia a higher percentage ofrespondents, as compared to global, implemented keyimprovements before divesting. This distinction may bere ective of market size, with fewer buyers in the Australianmarket; Australian vendors need to work harder toattract buyers.

We implemented key improvementsourselves before beginning the divestmentprocess. The company gets more value fromthe divestment if key improvements are inplace before the divestment rather thangive the buyer a roadmap on how toimplement key improvements.Defence contracting and infrastructure services company

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

44%

33%

We divest the business as it iswithout making improvements

We implement key improvementsourselves before beginning the

divestment process23%

33%

33%

We identify and document potentialimprovements for bidders

We divest the business as it iswithout making improvements

We implement key improvementsourselves before beginning the

divestment process

We identify and document potentialimprovements for bidders

34%

Australia

Which statement best characterises your approach to potentialoperational improvements in the business you are divesting?

Global


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New tax complexitiesThe survey showed that the experienced sellers consider taxearlier in the divestment process than others. The new morecomplex world of M&A makes this more important than ever.Like their global peers, most Australian survey respondentsalready involve their tax teams early in a planned disposalprocess; 88% do so early in the transaction lifecycle.Preparation encompasses both tax strategy analysis andpreparing the documents and records that prospective buyerswill want to see.

The after-tax consequences of buying anasset can vary dramatically depending onhow the transaction is structured so tax isde nitely a key consideration.Logistics company

Time is the major obstacle to preparationRegardless of the buyer, there is a clear trade off betweenspeed and value when it comes to preparation. The experienceddevote far more time to the whole divestment cycle. Globally, ofthe experienced sellers, 52% said it takes 6 to 12 months, with10% expecting more than 12 months. This is somethingAustralian companies are well aware of; 76% agreeing that asuccessful divestment takes 6 to 12 months.

Companies aiming to sell a business quickly must accept thatthey may receive a lower value than if they had taken the time

to prepare and market it properly. Even though speed is of theessence, you need to buy as much time as possible to get theprocess right, says Stephen Lomas.

Globally, in terms of obstacles to a successful divestment, lackof time was cited as having the most signi cant impact.Australian companies felt their biggest obstacle to achieving asuccessful sale was lack of time and also noted lack of expertiseas a factor in divestment strategies failing to deliver.

66% of respondents cited lack of time

62% indicated lack of expertise was an issue

54% thought lack of available nancial information was

an obstacle

38% cited lack of nancial resources

23% felt lack of attention from senior management wasamong the biggest obstacles

Lack of time

Lack of nancial resources

Lack of expertise

Lack of attention from senior management

Lack of available nancial information

What do you see as the biggest obstacles to successfulpreparation for divestiture?

Australia

Most signicant 1 2 3 4 Least signicant 5

0 20% 40% 60% 80% 100%

16% 38% 30% 8%8%

15% 8% 54% 15% 8%

15% 23% 23% 23% 16%

8% 54% 38% 0%0%

0%

42% 24% 17% 17%


13/24


The responses indicate that companies undertaking a sale shouldconsider additional experienced support to their teams, whetherthrough use of internal resources or hiring external support.

Although we had a good understandingand thorough idea of what was required, weunderestimated the time taken to collate allthe relevant documents. Given the currentturbulent economic climate, I believe every

company should have these documentsprepared upfront even if divestment is noton the horizon.Biopharmaceutical company

Reviewing past divestmentsWhen it comes to examining the success of a divestment,analysis of global responses to the survey show moreexperienced sellers approach this in a systematic way,understanding the necessity of learning from past divestmentsin order to streamline future transactions and maximise valuefrom the process.

58% of respondents indicated that they dont have aformalised review process in place, but generally review pastdivestments before embarking on new ones

25% have a formal process in place and always implement it

17% never review past divestments and evaluate newopportunities on their own merits

25% of global respondents also had a formal review process inplace that is always implemented. A further 20% however had aformal review process in place but did not always implement it;a pattern not re ected in the Australian responses, which maybe re ective of the market size in Australia and the fewernumber of serial transactors in the local market.

When evaluating a divestment, sellers need to go back to thereal reasons driving the sale. Sellers need to be clear aboutwhy they went into this. Was it simply a means of survival? Wasit to improve their overall capital structure? says GraemeBrowning. When evaluating, remember to look at the biggerpicture as well. Did you divest the right business? Are you readyto move the remaining business forward?

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

25%

20%

43%

We have a formal process in placeand always implement it

We have a formal process in place,but it is not always implemented

We never review past divestments we evaluate new opportunities on

their own merits12%

25%

0%

We dont have a formalised reviewprocess in place, but generally review

past divestments before embarkingon new ones

We have a formal process in placeand always implement it

We have a formal process in place,but it is not always implemented

We never review past divestments we evaluate new opportunities on

their own merits

We dont have a formalised reviewprocess in place, but generally review

past divestments before embarkingon new ones

17%

Australia

Which statement best summarises your company's attitudetowards reviewing lessons learned from past divestitures?

Global

58%


14/24


Changing markets force execution to the fore

Even in a buoyant market, divestment executionoften fails to match expectations. In todays morevolatile world, sellers will have to work even harderto avoid execution disappointments. Vendors mustdevote sufficient resources to the divestmentprocess or risk losing control of the sale process.If this happens, divestments will lose value or even fail.

Achieving goalsIn the current environment, companies must accept that ndinggenuine buyers is likely to be dif cult and ex their salesprocesses accordingly. Without an alignment of the currentmarket conditions and their own expectations, sellers mayincreasingly fail to meet their divestment goal.

The global and Australian responses were aligned in terms ofmain goals for a divestment. Maximising value, avoidingdisruption and controlling the process were the top threeresponses from both our global and Australian surveyrespondents.

But how successful do Australian sellers believe they were inachieving these goals?

As the table highlights the top four areas where goals were notmet were:

Divesting in the shortest possible timeframe

Minimising transaction costs

Maximising value

Controlling the divestment process

Reasons for failureThe primary external reasons for Australian respondents feelingthat the sale did not meet their expectations were:

Bringing the business to market at the right time and at theright price; 30% acknowledged they had misread marketconditions and an equal percentage indicated they hadmispriced the business for sale

Maintaining competitive tension; 30% cited lack ofcompetitive pressure as a key failure

The primary global external reason was also failing to read themarket conditions, with 29% of respondents highlighting this asthe main factor.

The main internal reasons for not meeting expectationswere cited as:

Not remaining focused on the ongoing operations during thedivestment process; 30% cited business performing belowexpectations during the divestment process

30% indicating that the business was not ready to operate ona stand-alone basis at closing

30% also expressed concern around not controlling

information ows effectivelyFor companies divesting today, there is clearly an increasedchance of a businesss performance deteriorating during thedeal. There are a number of ways to limit the impact of thisincluding; making sure that you have the right resourcing tomanage the divestment process while also running thebusiness; being open about any deterioration in performanceand to describe what corrective action can be taken; andputting appropriate incentives in place for the management ofthe business being sold.

The main global internal reason for failure was under-performance of the business during the process (25%).

Execution

Maximised value

Divested in shortest possible timeframe

Avoided disruption

Controlled the divestment process

Minimised transaction costs

Maintained condentiality

Minimised our commitments to transitionservices agreements

Minimised our representations and warranties

Considering your companys most recent divestiture, how well doyou believe you achieved each goal?

Australia

0 20% 40% 60% 80% 100%

25% 33% 25% 17%

0% 33% 50% 17%

0% 67% 8% 25%

Exceeded expectations Met expectations

Not applicableBelow expectations

0% 58% 25% 17%

0% 46% 27% 27%

8% 67% 8% 17%

0% 70% 0% 30%

17% 58% 0% 25%


15/24


0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

29%

21%

16%

13%

13%

36%

Misread market conditions

Lack of competitive pressure

Insufciently prepared forbidders diligence questions

Buyers nance fell through

The divestment exceeded ormet all expectations

30%

30%

30%

30%

Mispriced the business for sale

Misread market conditions

Lack of competitive pressure

Insufciently prepared forbidders diligence questions

Buyers nance fell through

Other, please specify

The divestment exceeded ormet all expectations

Mispriced the business for sale

10%

0%

20%

Australia

What were the primary external reasons behind your company'sfailure to meet or exceed expectations in its most recent divestiture?

Global

0 20% 40% 60% 80% 100%

0 20% 40% 60% 80% 100%

25%

16%

Business performed below expectationsduring the divestment process

Business was not ready to operateon a stand-alone basis at closing

The divestment exceeded or metall our expectations

12%

36%

30%

30%

0%

0%

Transition services agreements lastedtoo long or required too much effort

on our part

Unexpectedly largepost-closing adjustments

We did not control the informationows effectively

Stranded costs arose that wereunexpected or which we reduced

too slowly

Business performed below expectationsduring the divestment process

Business was not ready to operateon a stand-alone basis at closing

Other, please specify

The divestment exceeded or metall our expectations

Transition services agreements lastedtoo long or required too much effort

on our partUnexpectedly large

post-closing adjustmentsWe did not control the information

ows effectivelyStranded costs arose that were

unexpected or which we reducedtoo slowly

10%

30%

0%

30%

Australia

What were the primary internal reasons behind your company'sfailure to meet or exceed expectations in its most recent divestiture?

Global

18%

15%

16%


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Lessons learnedWhen asked what would they do differently to achieve theirgoals during their most recent divestment, half of Australianrespondents said they would have engaged in bettercommunication with employees, customers and suppliers.

Communication 50% of Australian respondents indicatedthat developing a clear communication strategy for engagingstakeholders will help to maintain con dence throughthe divestment

Earlier and more detailed planning 40% of Australianrespondents felt that a heightened state of readiness todivest would have enhanced the successful managementof the process

Resources 40% of Australian respondents identi ed theneed to assign more resources to the transaction process. Itwas felt that lack of resources and management imbalancebetween focusing on the divestment and the day to dayrunning of the business, can impact the divestment processitself and perpetuate timeframe challenges

Identifying synergies 40% of Australian respondentsidenti ed the need to have a better understanding ofpotential synergies for each bidder, with 20% indicating thatbetter preparation of information for bidders would havemade a difference

The most common global response to what a vendor wouldhave done differently was earlier and more detailed planning(41%).

0 20% 40% 60% 80% 100%

Earlier and more detailed planning

Better understanding of potential

synergies for each bidder

Allocation of more resources tokey areas of the transaction process

Earlier identication and mobilisationof key managers and employees

Performing our own comprehensivevaluation and nancial modelling analysis

More thorough preparation ofinformation for bidders

More extensive due diligence ofthe divested entitys risks ourselves

More time expended drafting andnegotiating transition services agreements

Earlier initiation of the audit of thedivested entitys nancial statements

Development of a remediationplan for stranded costs before closing

Better communications withemployees, customers and suppliers

Earlier and more detailed planning

Better understanding of potentialsynergies for each bidder

Allocation of more resources tokey areas of the transaction process

Earlier identication and mobilisationof key managers and employees

Performing our own comprehensivevaluation and nancial modelling analysis

More thorough preparation ofinformation for bidders

More extensive due diligence ofthe divested entitys risks ourselves

More time expended drafting andnegotiating transition services agreements

Earlier initiation of the audit of thedivested entitys nancial statements

Development of a remediationplan for stranded costs before closing

Better communications withemployees, customers and suppliers

Australia

What could your company have done differently to achieve itsgoals during its most recent divestiture?

Global

0 20% 40% 60% 80% 100%

41%

32%31%

28%

21%

31%

18%

18%

18%

13%

12%

40%

40%

50%

40%

10%

40%

20%

30%

10%

10%

0%


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Carve-outs and operational separationRespondents were also asked to rate frequency of issues arisingpost completion. In Australia, post-closing legal disputes wereuncomfortably high at 18% with legal liability issues andunexpected operational separation issues also arisingfrequently in the post completion phase.

Carving out a division of your business can be very complex. Itcan lead to functional, reporting and crossselling breakdowns.You need to be very clear about what you are selling, carefullysecure the perimeter and understand the implications on thebusiness that stays behind. Stephen Lomas points out that aquick sale, which leaves no time to deal with these complexissues, may prove too great a risk: You may need to considerselling another asset that can be separated more easily, ratherthan run the risk of hastily severing ties with an operation thathas a main business artery running through it.

In the current economic climate, with deals becoming morecomplex and timescales looking to be accelerated, disputes are

likely to increase. The vendor needs to focus on the duediligence and disclosure process to ensure that all issues areproperly disclosed to bidders. Stephen Lomas continuesFurthermore, the terms of the sale and purchase agreement,and any completion mechanism must be clearly articulated.Warranties and indemnities should be kept to a minimum.

Post-closing legal disputes

Post-closing transition servicesagreement disputes

Unexpected operational separation issues

Legal liability issues

In your completed divestitures, to what extent have the followingbeen issues?

Australia

Never Sometimes Frequently

0 20% 40% 60% 80% 100%

18%46%36%

18% 82% 0%

9% 82% 9%

36% 55% 9%


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Unprecedented times for business

We conducted the global divestment survey duringNovember and December 2008 at a time whendivestments had become a vital activity for manycorporates. Even in the short time since then,Australia has seen the economic crisis deepen withtransactions becoming harder to complete; fewerbuyers, less capital, uncertainty around valuationsas well as future performance increasing the risk oftransaction failure.

Successfully sustaining and growing businesses in todaysvolatile environment requires new thinking at a fundamentallevel. Not only deal structures and deal nancing but also interms of re-evaluating the seats of power; the shift to the buyerand the shift from management driven divestments to theBoard, or even shareholders, as the initiators. And, given theincrease in distressed asset sales, nanciers and creditors havealso moved to centre stage. Management need to acceleratetheir response times; being prepared to act quickly when otherparties may push for a sale or in response to the increasingdemands for comprehensive information from a narrow eldof buyers.

Those that are currently considering the sale of a business needto focus on the leading practices for successful divestments in adownturn. We call them the 10 Golden Rules. Whetherproactively reviewing your portfolio, customising your businesscase for each buyer or developing a detailed roadmap foroptimal operational separation, these rules enhance a sellersopportunity for a successful transaction and to maximise thevalue of any divestment. The most successful sellers will bethose that adapt swiftly to these new demands.

These are indeed unprecedented times for business.


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10 Golden Rules for successful divestments in a downturn

Leading practices for divesting in the current market:1 Enable faster and more considered decision making through regular portfolio evaluation

2 De ne the trade-off between time and deal value3 Customise the business case for each potential buyer

4 Consider the role you may need to play in the buyers nancing

5 Pursue multiple divestment options

6 Be aware that traditional nancial due diligence may no longer be suf cient

7 Assume that sale processes will no longer be structured

8 Deliver timely, regular communication to engage the bidder

9 Develop a detailed roadmap to guide operational separation

10 Assess the likelihood of material value shifts occurring during closing and post-closing


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A transaction can be one of the most complex and challenginginitiatives an organisation can undertake. Strategy andexecution need to continue ef ciently and effectively in anenvironment where speed is critical, resources limited and thereis pressure for results. Ernst & Young can help; from initialstrategic assessment through to implementation and post-integration, our focus is on helping you enhance yourtransaction outcomes.

Sell side Across the divestment lifecycle we work with you tomaximise sale value and minimise transaction risk. We canassist you in managing the entire disposal process, includingpre-sale business preparation, identi cation of and liaisonwith prospective purchasers, assistance with valuationconsiderations, negotiation strategies, vendor due diligence,transaction structuring and negotiations with valuationconsiderations and terms and conditions.

Buy side We can help you to identify possible acquisitionopportunities and assist you understand and resolve potentialissues, giving you con dence, decreasing lead times andaccelerating execution. We can assist in managing the entireacquisition process, including the identi cation of and liaisonwith prospective targets, assessment of alternative fundingstructures, valuation considerations, acquisition duediligence, negotiating strategies, bid preparation, transactionstructuring and negotiation of nal documentation and termsand conditions.

We work with many of the worlds largest organisations, fastestgrowing companies and private equity rms on some of themost complex transactions in the global market. We tailor ouradvice to your business and focus on helping you to improvegrowth and pro tability. Our experienced professionals haveworked on transactions in all markets and industry sectors andare dedicated to assisting you achieve success throughout thetransaction lifecycle.

How Ernst & Young can help you


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Contacts

Oceania Sell Side Leader

Name Tel Email

Stephen Lomas +61 3 9288 8441 [email protected]

Regional Sell Side Leaders

Graeme Browning New South Wales

+61 2 9248 4751 [email protected]

Stephen Lomas Victoria


Anne-Maree Keane Queensland


Angus Blackwood South Australia


Justin Audcent Western Australia


Andrew Taylor New Zealand


Gareth Galloway New Zealand


Other contacts

Valuations and Business modelling

John Selak + 61 3 9288 8329 [email protected]

Transaction Tax

Don Green +61 2 8295 6104 [email protected]

Transaction Integration

Robert Arvai +61 2 9248 4276 [email protected]


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Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 peopleare united by our shared values and an unwavering commitment to quality. We make a difference by helping our people,our clients and our wider communities achieve their potential.

For more information, please visit www.ey.com/au

2009 Ernst & Young Australia.SCORE Retrieval File No. AUNZ00000053

This communication provides general information which is current as at the time of production. The information containedin this communication does not constitute advice and should not be relied on as such. Professional advice should be soughtprior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability(including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arisingfrom anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information.Any party that relies on the information does so at its own risk.

Liability limited by a scheme approved under Professional Standards Legislation.

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