PROCESS OF DIVESTMENT

Divestment is a complex transaction or selling off assets, subsidiaries, or investments of a

company. Divestment is usually referred to in the context of non-core units of a business
traditionally undertaken to maximize value in a company. With the change in regulatory and
tax structures as well as constantly shifting consumer expectations, companies usually
undertake this process for streamlining their operational models and concentrating on the core
business fundamentals.

In the current times, due to the ongoing turmoil and disruptions, the process of divestment
could offer a quick response to these continuous & unpredictable changes simultaneously
providing sustenance to core business operations. Divestiture allows a company to adapt to
unexpected market shifts, especially in the current landscape, employing methods to adapt
better to offer a proactive response to these market changes. A company not only needs to be
agile but requires access to sufficient capital for investments. This process is an essential
component of growth and transformative strategy where the resolution of NPA (Non-
performing Assets) could provide an efficient way of deleveraging Balance Sheets. It
provides a means of refocusing on core business following a reassessment of capital
allocation and business strategy. With the impact of the pandemic on the workforce, it could
provide a way of supporting remote workforces overcoming disruptions. A strategically
modelled company with a streamlined & optimized portfolio is seen better equipped for
management of assets and could in term help in transitioning of fixed costs to variable cost
providing better shareholder returns and agility to the company and with the significant stress
on finances of the company with an expected liquidity crisis as well as cash crunch, the
process of divestment could help in reviewing the operation for creation of value and prepare
for detailed diligence of business freeing up capital and providing a cash injection for
creating better value in these tumultuous times while also staying in accordance with
corporate strategy of the company

For undergoing the divestment company needs to undergo the following transaction. Though
these transactions are complex, they need to occur consistently in a material manner for better
asset management.
STEP-1 MANAGEMENT & STRATEGIC ASSESSMENT
This consists of analysing the portfolio of the organisation, qualifying and identifying the
divesture candidature and taking a valid decision over determining the ideal or optimal form
of transaction

Analyzing Business Portfolio

As an important aspect of the planning process, it is done to evaluate all units of business and
determine the compatibility of these units with the long-term goals of an organization.

Identification of suitable candidate for divestiture

An analysis of compatibility could provide insights over how macro-level changes such as
regulations and technologies affect individual stagnation or contracting of business. These
candidates could help in the generation of cash and integration with the previously acquired
business. It further helps in providing clear indication over the units, which are incompatible
with the business objectives and long-run goals.

Validate Divestiture Decision

Useful in assessing strategic compatibility such as underinvestment, poor management, or

market disruption. It helps to determine the underlying cause for such incompatibility and
provides strong evidence over a preferred course of action based on a thorough analysis of
strategic and financial implications.

Structuring the Transaction

Determining the structure and form of divestment transaction includes determining whether
the asset is to outright sold or there is a need for the creation of a separate entity or
exchanging the assess with another corporation such as cash.

STEP-2 PLANNING THE DIVESTURE

Following initial understanding over the desirability of divestiture, an undertaking of the

following task should be initiated for planning the process of divestment: -

Obtaining Corporate Approval: -To move forward in the process of divestment approval is
required from the CEO of the corporation and the board. This is done by presenting a
document with a recommendation based on thorough considerations. It would contain the
background discussion of the business and its market, valuation estimates, a background
discussion of the business and its markets, valuation estimates, a description of alternative
transactional approaches that were considered, and a description of the planned divestiture
process contemplated, as well as a timeline for planning, preparing, and executing the
transaction.

Creation of Organizational Plan: - This would include determining the leadership of the
business unit which includes its chief executive and senior management team and
identification of all customer-related function & transactions by performing an operational
analysis. Further, the primary functions which are necessary for the unit should be identified
and based on analysis of executive and infrastructure of the unit, after which all the
employees/staff that will be retained by parent company should be assigned

Creation of Retention Plan: - Identifying all the key individuals and if necessary,
formulating a plan for rewarding them for staying with the business unit until it is sold

Assembling Divestiture Team: - This includes the creation of a team that could help in
formalizing the divestment plan, driving the process and ensuring its proper execution. This
team consists of

 A core team of senior executives

 External consultants and advisors
 Selected internal experts and managers
 CEO of the parent organization.

Developing Divestiture Plan:- Following this a plan is created for outlining the core
activities of the transactions, identifying all the tasks, deliverables and milestone to be
accomplished by the transactions and assigning responsibilities by establishing deadlines for
these and identification of critical points associated with making and executing decisions; and
significant risks that are associated with the transaction and developing a plan for the
announcement of divestment

STEP 3 PREPARATION OF DIVESTITURE

Sales Preparation

 Engaging external resources

External resources that can be employed for effective divestment are: -
o Financial Advisor: - Guides the valuation of business, the transaction structure,
the selling approach employed, and buyers to be targeted. Also helps in selling the
materials and orchestrating the sale
o Independent Accounting Firm: - Performs specified procedures relative to the
financial information provided to buyers. The nature and extent of the methods
will depend on the intended use of the financial report.
o Advisors with regulatory or legal expertise
 Determine sales process & developing prospectus
 Identifying potential purchasers of the business unit and determining the process for
divestment i.e. whether it is best to bring the business to market via an auction, or
rather entertain a pre-emptive bid by a single buyer. The offering document (also
referred to as an offering memorandum or prospectus) contains a substantive
description of the business, its historical financial performance, and its strategic
potential.

Disentanglement Preparation

o Creation of cross-functional team: - Responsible for identifying all material

interdependencies between the selling corporation and the business unit being
sold
o Identify interdependencies: - The first task of the disentanglement team is to
perform a comprehensive review and identify these interdependencies and
identification of interdependent services.
o Resolving interdependencies
o Presenting financials of business for sale: - Presenting financial information
such as the audited financial records, financial statements, due diligence or
satisfaction of regulatory requirements

STEP 4 DIVESTITURE EXECUTION

After completion of the preparation, the next thing is to initiate the sales effort i.e.

Announcing Intent to Sell

The public announcement of the sale is then made. Shareholders, Potential buyers, customers,
suppliers, and employees of both selling corporation and the business being divested are to
made aware of the impact of this sale..

Management of the Sale process

The divestiture team now has to execute a deliberate and highly structured auction sale, i.e.,
screening initial bids from buyers through NDA, following which those qualified to receive
an offering document with a request for an initial proposal and a description of how the
bidding process will be managed. Advisors assess the credibility of the buyers and their
ability to obtain financing and ensure their commitment to closing the deal.
Following this, a limited number of bidders are to be invited to proceed to the preliminary
due diligence where they interact with senior management of the business and assess the
business unit and after this final bids are made where they make their best & final offers as
per the preliminary due-diligence done by them and then the winning bidder is selected by
the seller for confirmatory due diligence

Negotiation of the Transaction

Negotiation of contracts & agreements is done, which may include a transition services
agreement (TSA), a commitment of the seller to provide unwavering support, and back-office
services to the acquirer for a limited period while the buyer transfers the business unit to its
owner. A purchase agreement is made, which is a definitive legal document governing the
divestment setting forth the financial and legal terms of the transaction.

Closing Transactions

It can occur after a definitive interval after the satisfaction of certain conditions or
requirements or could occur immediately after the signing of a purchase agreement. Though,
it is necessary to separate the two. This is the situation when one or more of the following
conditions must be met:

 Finalizing the finances of buyers:- An interval of time is required for concluding the
arrangement if the financing of the transaction is done by third party debt
 Approval by the government:- Transactions above a specific size or with certain
characteristics may require governmental approval. These requirements generally
relate to assessing any potential impact of the transaction on competition (i.e., anti-
trust concerns).
 Consents by Third Party:- There is a requirement of approval of a third party which
could be other than the government in some cases before closing the transaction.
These third parties. If the transaction is structured as an asset sale, certain material
contracts may not be assignable without third-party consent