Preparing the divestiture, Financial Management

Assignment Help:

Preparing the Divestiture

No two divestitures are exactly alike and one of the foremost tasks of the project team is to determine precisely what is to be sold. While some divestitures involve the sale of assets, others involve sale of legal corporate entities. When determining specifically what is to be sold, tax, legal as well as business implications are required to be considered from both the buyer's and seller's perspective.

A number of other issues, in addition to the form of the transaction, are to be considered in preparing the divestiture. Divestitures involving stand alone businesses that have no ongoing relationship with the selling corporation after the sale are the cleanest divestitures. Divestitures, however, often involve some sort of continuing business relationship. The selling corporation may be the supplier of products and/or services to the business being sold, which are critical to the future success of the business. The purchaser will, therefore, expect to negotiate some sort of a service agreement as part of the transaction. In other words, there may exist marketing or distribution dependencies between the selling corporation and the business being divested. Further, the purchaser would prefer to develop operationally viable and economically feasible agency agreements as part of the transaction. It is, therefore, essential to carefully analyze these types of interdependencies at the very outset of the divestiture project. Major problems can often arise in the successful completion of the divestiture due to failure to understand these interdependencies and to prepare for their resolution as part of the overall transaction. The least that can happen is that discovery of critical interdependencies late in the negotiating process can seriously impact the selling price or deal structure, and may cause the buyer to relinquish the deal.

The resolution of management and human resources issues is another important matter to be considered in preparing the divestiture, and may affect the nature, timing, and valuation of the business. If key members of the management or if staff expertise are valuable assets critical to the future success of the business, these people should be retained and motivated to assure a successful sale. It is necessary to understand and address the needs and desires of these people early in the divestiture process. Special compensation and employment contracts are useful tools to be considered in some instances in order to assure management and staff cooperation in the divestiture process. The manner in which employees are handled has a role to play in deciding the price a buyer is willing to pay for the business and the net value of the deal to the seller.

Most of the efforts in preparing the divestiture go into gathering data and information necessary to present the business to prospective purchasers. Several purposes are served by this data-gathering exercise such as:

  • It enables the selling corporation to make some policy-type decisions.
  • It forms the basis on which the initial selling document or offering memorandum is developed.
  • It serves as the foundation for business reviews to be held with serious prospective buyers later in the selling process.

Thus, as a result of preparing a business for sale, the project team, often, ends up knowing more about the business being sold than either the management of the business or the selling corporation. In other words, successful divestitures depend upon careful preparation and intimate knowledge of the business being sold.

In preparing a divestiture, it may be helpful to review the requirements of types of data and information in the context of a typical offering memorandum. Although the preparation of a formal offering memorandum is not required for all divestitures, the data and information necessary to initiate the selling process tend to be the same. The type of selling process decides whether or not to prepare a formal offering memorandum. A formal offering memorandum is essential if the business being sold is to be offered to a number of potential buyers, either sequentially or on a competitive bidding basis. The formality of an offering memorandum may not be necessary if the selling corporation is highly confident of knowing the buyer and that the deal will be done with that one party; however, the prospective buyer has to be provided with the same level of information.

The offering memorandum must provide sufficient details to the prospective buyers to ascertain their genuine interest in acquiring the business. It should be accurate in every respect. Errors or misstatements about the business can cause serious difficulties in consummating the transaction and may cause discussions to be terminated completely. The offering memorandum should emphasize the strengths of the business and, where possible, position these in alliance with the strategies or potential strategies of prospective buyers.

 


Related Discussions:- Preparing the divestiture

What are the weaknesses of the traditional approach, What are the Weaknesse...

What are the Weaknesses of the traditional approach The traditional approach to the scope of finance function evolved during 1920s and 1930s and dominated academic during 40's

Factors affecting investment decisions, I have a question for my homework, ...

I have a question for my homework, which is: Explain, using relevant instances, how investment decisions are affected by different factors. Help please?

The japanese pension fund system, The Japanese Pension Fund System The J...

The Japanese Pension Fund System The Japanese pension system is a multi-pillar system. Public and private pension schemes are the two important pillars. The first tier is the Ba

Historical look at the treasury yield curve, The minimum interest rate ...

The minimum interest rate which investors demand for non-treasury securities is represented by the yield offered on the treasury securities. This is why market particip

Assignment ., Gretz Tool Company is a large U.S based Multinational Corpora...

Gretz Tool Company is a large U.S based Multinational Corporation with subsidiaries in eight different countries. The parent of Gretz provided initial cash infusion to establish ea

Define the problems into capital budgeting analysis, What problems can take...

What problems can take place into the capital budgeting analysis if project debt is evaluated in place of the borrowing capacity created by the project? If project debt is grea

What is the cash flows from financing activities, Cash flows from financing...

Cash flows from financing activities: Items included in this heading are: Cash receipts Cash payments Cash  receipts  from  iss

Bank loans for a company seeking short-term financing, What are the pros an...

What are the pros and cons of commercial paper relative to bank loans for a company seeking short-term financing? Commercial paper is generally a cheaper source of short-term f

Relationship between financial decision making and risk , Discuss the relat...

Discuss the relationship between financial decision making and risk and return. Would all financial managers view risk-return tradeoffs similarly

Example of relationship between bond price and time, Illustration    ...

Illustration      Discount bond (5 yr. bond with 10% coupon) (expected rate yield at 12%) Premium bo

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd