Is There a Divestiture in Your Company’s Future?

By Ken Jaroenchisakon

In a recent blog, we discussed how IT systems integration can help organizations smooth the bumps in the road of a merger or acquisition, while creating and sustaining momentum through a successful Day 1. (For more on that topic, check out our ebook, Accelerating M&A Momentum in the Digital Age.)

Speed and momentum are equally important for companies divesting assets and the new standalone entities a divestiture creates. But the IT and business challenges are somewhat different during a divestiture than an M&A. In this blog, we’ll examine where integration plays a role.

Divesting is Disentangling, not Merging

Although there are always exceptions, companies that practice a disciplined M&A strategy during a growing economy often reshape their portfolios through divestiture during a slump. Nevertheless, business leaders may spend more time deciding whether to divest rather than how to divest. And as with M&A, speed matters. McKinsey research reveals separations completed within 12 months of announcement generally deliver higher returns to shareholders than those that take longer. Delays can jeopardize a deal or reduce its value.

The divesting process can be broken into three phases: defining, marketing, and disentangling the asset. IT systems play a major role in phase three, where separation can pose risks to various stakeholders, processes, and functions. Efforts to minimize these risks can affect the scope and timing of the separation, which in turn may influence buyer priorities.

Confronting the IT Chaos of Divestiture

Divestiture presents hurdles for the divesting company and the newly created standalone entity, which typically inherits many legacy applications that need maintenance while running its present operating environment. This is a drain on often already stretched-thin IT resources. And it makes executing rapid, market-driven modifications to quickly meet business requirements more difficult.

One of the most common pressure points for both the divesting and the divested organization is legacy middleware platforms that hinder the development, execution, integration, and governance of data flows from multiple and constantly changing sources. The stress of divestiture can show the inflexibility and inadequacy of these platforms and the high cost in time and IT resources required to get them to support business objectives.

To address the IT chaos of divestiture and avoid additional costs, companies need to quickly stand up new environments in accordance with the transition services agreement (TSA) and, equally important, ensure employees from all departments have a consistent, single, trusted view of data they can operate from. It’s important to create a frictionless experience for employees as they access and share data, while managing onboarding and data stewardship policies.

The Clock Ticks Faster During Divestiture

The corporate finance institute makes a good case that divestiture is actually a trickier proposition than M&A, at least from the timing angle. They point out that divestiture is typically more labor intensive and usually comes with strict time constraints. So, just as the divested entity needs a good integration platform to function efficiently once a deal closes, the divesting organization needs one as well to stitch things back together once the “surgery” is complete.

Facing M&A and Divestiture technology challenges? Get our eBook and plan for success: “Accelerating M&A Momentum in the Digital Age