Why are Megadeal Divestitures More Challenging?

Navigating the intricacies of divestitures within the context of Megadeals is a complex process that organizations increasingly grapple with as corporations become larger than ever and the Federal Trade Commission (FTC) and Department of Justice (DOJ) become more aggressive toward anti-trust concerns. In this article, we will delve deeper into the challenges faced by these organizations and the various hurdles they encounter when divesting business assets as part of these transformative deals. Understanding these challenges will empower management to proactively set a course that will help navigate the complexities of Megadeal dynamics.

The stakes are undeniably high in a Megadeal, where strategic alignment and executive decision-making become even more critical. Regardless of the underlying rationale such as regulatory approval, capital accumulation, or corporate portfolio rebalancing; Megadeal divestitures present a new set of challenges that can often be unanticipated.

Regulatory Approval: A High-Stakes Game

The quest for regulatory approval is the most complex and common reason for divestitures. When a Megadeal faces regulatory scrutiny, the seller often finds themselves in a position of weakness, grappling with several dilemmas.

• Structural remedies involve a complete financial and operational separation of the business. This means disentangling shared services, employees, business processes, and IT systems, all while keeping an eye on the Megadeal integration. The challenge lies in the careful planning and execution of this separation without losing sight of the larger deal.
• Conduct remedies, on the other hand, depend on the unique circumstances of the transaction. These remedies, involving legal agreements, intellectual property licensing, policies, and contractual agreements, require a delicate balance of management, legal, and corporate development considerations.
• Hybrid remedies offer an innovative way to limit business operation impacts by divesting assets that can’t be resolved by conduct remedies alone. However, these solutions require creative thinking and careful planning for the future state of the business.

Raising Capital: A Delicate Dance of Timing and Choices

To underpin a Megadeal, raising capital frequently necessitates divestments, especially for private equity and other financial buyers. This can translate into the strategic offloading of assets that don’t align with the overall deal thesis. However, this path is laden with challenges, primarily related to timing, the nature of financial considerations, and the selection of the right buyer profile.

Take for example the well-known case of Dell’s ambitious $67B acquisition of EMC. To finance this colossal deal, Dell resorted to substantial debt, creating a pressing need for capital. This urgency eventually led to a series of divestitures, including the sale of its $2B software division (comprising Quest Software and SonicWALL) to Elliott Management and Francisco Partners, as well as a $3B deal transferring Dell Services to NTT Data.

In such a scenario, the pressing need to close a Megadeal can severely limit the ability to time the market, potentially leading to less-than-ideal valuations. With the clock ticking, organizations are often forced to focus on immediate cash injections, inhibiting the flexibility typically associated with deal structures. Options like equity considerations or spin-offs, which could potentially yield future gains, are frequently sidelined in favor of immediate liquidity.

Moreover, when there’s an urgency to raise capital, the pool of prospective buyers can often narrow, introducing further constraints to the divestiture strategy. For instance, a seller might prefer partnering with a financial buyer to explore post-divestiture strategic opportunities. However, the urgency to close the deal might force them into selling to a strategic buyer, potentially creating post-divestiture competition.

Active Corporate Portfolio Management: A Complex Endeavor

Active corporate portfolio management becomes even more challenging during a Megadeal, as the focus of management is primarily on integration. The hurdles here include complexity and prioritization issues, management uncertainty, and resource scarcity.

The simultaneous execution of a Megadeal and a divestiture can lead to a lack of direction among management. Management uncertainty will exist from the unknown future state integration management structure that Megadeal will influence. At the same time, the divested business will require management resources with a similarly undefined future pending the buyer and integration strategy.

Furthermore, the uncertainty of the future state can put additional pressure on the management resources and leave the management bench depth short of talent experienced in completing the divestiture transaction and operational separation activities. 

Lastly, resource scarcity, a common obstacle, can be exacerbated when the executive incentives are tied to the success of the Megadeal and typically do not consider second-order effects related to a divestiture.

Conclusion: A Path Forward

The rise in Megadeal activity across industries presents unique challenges not usually encountered in standard business operations. The needs for regulatory approval, capital, and active corporate portfolio management necessitate these divestitures. Understanding these challenges equips management with the tools to navigate this complex landscape.

Although the road to these challenges may differ based on deal rationale, being aware of potential hurdles can empower management to proactively set a course that will help navigate the complexities of deal dynamics.