The Acquisition and Divestment Strategy

Strategies for acquisition and divestiture is one of the most complex aspects of an M&A process. It is crucial to continually examine assets to distinguish between core and noncore assets. Without an effective strategy and a well-planned divestiture plan, the cost of acquiring a company can be higher than its value by a substantial margin. Similarly, the cost of keeping non-core assets can be more than their value. This is why it’s important for managers to put the required resources in preparing and structuring divestitures.

The first step in a divestiture is to identify potential buyers for the selected asset. Financial modeling and discounted cash flows (DCF) analyses are employed to achieve this. Typically, this process is performed by finance professionals.

Once the company has identified an interested buyer, it is able to begin negotiations for a sale. This is an essential step to ensure that the company can sell the asset at a fair value. After the sale is completed the company will get an enormous cash flow. This cash inflow is usually used to expand existing business divisions or explore new avenues of business. It can also be utilized to pay down debt.

A divestiture is a method to take down a non-profitable business. This kind of divestiture typically is a carve-out which the parent company maintains an ownership percentage or spin-off, in that the subsidiary is sold to shareholders as an independent entity. In both cases, the goal is to maximize the value. A successful divestiture requires a solid plan for communicating and an understanding of the needs of employees after the transition.

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