Other parts of this series:
In the first of this three-part series, we looked at what Australia’s financial services (FS) firms must do to rediscover their purpose and regain customer trust—a process that culminates in deciding which assets to divest. In this post we will look at the next step: mapping the roadmap for divestment.
Mapping the journey
Once FS firms have carried out a portfolio and strategy review, and ranked core versus non-core assets, they need to conduct due diligence and shape the deal. This consists of three stages:
- Identify potential buyers and define the boundaries of the new entity to ensure an effective separation between it and the firm’s core assets
- Carve out the assets to be divested and help the buyer unlock maximum value
- Align all stakeholders by using a transparent divestment strategy
Step 1: Assess the buyer universe
One option is to hire investment banking consultants, but that is costly. An alternative is using analytics tools to generate lists of potential buyers—incorporating data from industry sources such as S&P Capital IQ and Dow Jones’s Factiva, and information from public financial listings and media coverage.
Regulators, shareholders and employees are interested parties in any divestment and their support is crucial. That means being transparent about the divestment strategy from the outset.
Such tools should incorporate scoring algorithms tailored to the firm’s M&A strategy. A long list of potential buyers can be whittled down by filtering based on an in-depth assessment of each, making an efficient buyer-approach pipeline. It also permits rapid screening cycles that can be updated to inform and improve the M&A strategy, and let the seller better prioritise and assess the strategic fit of potential buyers.
Next, the firm must define the boundaries between assets it will retain (the “ParentCo”) and those it will sell (the “NewCo”), and ensure effective separation between the two. Software tools can help define the boundaries of what will be sold, factoring in aspects such as products, markets, brands, business functions, customers, employees, IT systems and facilities (see chart).
Step 2: Unlock maximum value
Helping the buyer unlock maximum value lets the seller get back to purpose faster. This starts by crafting a compelling proposition: carrying out due diligence from the buyer’s perspective on the for-sale assets. This should take a forward-looking view that can show, for example, the future value of the asset for a buyer for whom the business is core or can provide crucial synergies.
Beyond this, sellers must be ready to provide more data. The increased focus on analytics-backed deals means potential buyers want access to asset data once a sale is underway. Buyers look beyond traditional data like historic results and performance, and want to incorporate information like customer feedback, social media sentiment and data underpinning assets’ Net Promoter Scores (NPS). Having this on hand can help avoid any surprises the sale process might uncover.
Lastly, the seller must ensure it pre-empts risks, maintains accountability and meets regulatory challenges—such as complying with the Banking Executive Accountability Regime (BEAR), and retaining strong risk and control safeguards. Being transparent about risks boosts the seller’s credibility and makes it less likely that the deal could fail.
Step 3: Align all stakeholders
Regulators, shareholders and employees are interested parties in any divestment and their support is crucial. That means being transparent about the divestment strategy from the outset.
Transparency with regulators is key because anti-trust issues and other concerns mean deals increasingly fail at the regulatory stage. Additionally, new regulatory challenges such as BEAR and the Banking Code of Practice (BCoP) mean accountability and control must remain in place after the sale, with no impact on customers.
Shareholders constitute the second party, and increasingly play a greater role in M&A activity: Some might advocate for a business unit’s sale, or challenge an asset sale or merger if they feel it is poorly articulated or executed.
Failure here can be costly, as Australian wealth management firm AMP found in 2018 when it said it would sell its life assets for A$3.4bn to Resolution Life.1 AMP hadn’t communicated all deal elements to its shareholders, leading some to claim the unit was being under-priced by at least A$2bn.2 The fallout contributed to a 22 percent drop in AMP’s share price.3
Employees are the third party, because uncertainty around job cuts and the impact of a sale can lower morale and productivity and drive up internal resistance.
Once the announcement is made, the firm should publish a transparent divestment strategy that contains clear key performance indicators (KPIs). Doing this—and getting alignment from key parties and commitment from team leads—will meet regulatory needs and reassure shareholders and employees.
Successfully mapping these steps helps to set up the firm for the penultimate stage: executing the transactions with precision and speed, which is the subject of our third blog.
1Fundies furious with AMP over asset fire sale, Australian Financial Review 10/30/2018
2AMP shareholder’s plea for sanity, Australian Financial Review 7/30/2019
2AMP shares hit by perfect storm in biggest ever one-day fall, Australian Financial Review 10/26/2018
Nice post.