M&a 101 - Part two
Introduction to Divestures
There can be nothing to buy without a Seller. Understanding why the Seller is looking to sell, how much they are looking to sell and where the consideration is going is vitally important.
There are, generally speaking, four main types of Sellers:
- The Spinoff
This seller is divesting part of its company to focus on fewer or different offerings. Usually divesting a division, department, product or specific assets. This is typically the seller we deal with the most.
- The Change of Control
Here the seller divests more than 50% of its company so as to trigger a change of control. Usually here the owners or directors are looking to sell their stakes and move on.
- The Recapitalisation
Similar to a change of control, except here the seller is looking to keep control of the company and divests less than 50% but this still allows the owners directors to take some cash out of the business.
- The Growth Capital
This seller is looking to raise capital to invest into the business and issues and sells more shares of the business as opposed to selling the business itself.
Reasons For Selling
Understanding the reasons for selling is important for understanding the power dynamics within a deal. Is the seller desperate to sell? Is the sale driven by personal or business reasons? How many credible alternative buyers are there?
Negotiating theory calls this a BATNA – ‘Best alternative to a negotiated agreement.’ If I am certain that I can sell to Firm X for 100, I can be pretty bullish in attempting to sell to Firm Y for 105. (Fisher and Ury, ‘Getting to Yes.’) Below we break down some of the common reasons for selling or divesting.
Usually driven by considerations of family, lifestyle, finances or lack of desire.
- Change of Management
Usually driven by owners who don't want to retire but would like a different challenge.
- Spinning off: Product or division
Products and divisions are spun out for a number of reasons, some of the common instances include products or divisions which: were the result of a previous poor acquisition, are not making a profit or whose expected synergies did not materialise, or who no longer form part of the business strategy going forward.
Usually done to raise to capital to invest back into the company. Two types exist. Controlled investment where the investor buys enough of the company to have control and non-controlled investment where the buyer buys less than 50% of the company and does not get outright control.
- Industry Changes
A seller, predicting a change in the industry will render his company obsolete or less competitive often seeks to sell. Think horse and carriage manufactures before cars. Or Tobacco companies selling up to focus on cannabis sales instead.
- Distressed Company
Companies become distressed for a number of reasons, including: changes in the economy, pandemics, mismanagement, changes in industry preferences etc. Some of these companies may just need an experienced hand or injecton of capital to turn them around and as such, often present attractive, although risky, targets.
- Diversifying Assets
Also known as recapitalisation, this is when an owner of a company is looking to liquify some of its assets by selling them to someone else.
- Management buy out
Usually motivated by a relationship breakdown between the existing management/owners resulting in an external party purchasing the disgruntled owners' share in a business.