By Arthur Bert and Caroline Firstbrook, Accenture

Using Divestitures as a Lever for ChangeThere are several reasons for thesurge. First, divestments are often aprecondition for approval of largemergers, required by regulators whosejob is to guard against aggregations of excessive market power. (Procter &Gamble had to sell off its Right Guardand Rembrandt lines before it couldacquire Gillette.) Divestitures alsoprovide a way for companies to tailortheir portfolio and raise capital in orderto make acquisitions in markets thathave greater strategic appeal. And intoday's buoyant private equity market—which in 2003-2005 accounted formore than twice the level of acquisitionactivity as from 1995 to 2005—thepresence of cash-rich buyers willing tobid for most assets has prompted manycompanies to put non-core businesseson the block. CEO turnover, now runningat very high levels, is another likelycause: Accenture's research showsthat more than half of all divestiturestake place within two years of theappointment of a new chief executive.These drivers are expected to keepdivestitures on the boil, with recentpeaks in M&A deal making expected toproduce high levels of activity for thenext 12 to 24 months.A review of the divestiture activities ofvarious companies reveals two importantinsights. The first is straightforward:There are best practices for conductingdivestitures that can be learned andapplied to maximize the value of thedeal and minimize the costs to thedivesting organization. (We will discussthese practices later in the paper.)

The second insight is more profound—andmore interesting. Accenture has foundthat while many companies continueto treat divestitures as one-timetransactions, to be executed as quicklyand painlessly as possible, leading-edgepractitioners are increasingly usingdivestitures as levers to initiate broaderstrategic change across their businesses. Using Divestitures as a Lever for ChangeAs is true of any significant transaction,a divestiture creates a window ofopportunity through which anorganization can anticipate andprepare for change. Companiesseeking high performance can use theopportunity to push through a broadrange of transformational initiatives.Examples include:• Revitalizing overall business strategy• Changing how the organizationdeals with customers• Enacting critical changes incorporate culture• Optimizing back-office functionsLet's discuss each initiative in turn.Revitalizing Business StrategyAn exit from a business, particularlyone which has formed a core part of The surge in M&A activity in the past 18 monthshas also given a boost to divestitures. In a 2006Accenture survey of senior executives conducted bythe Economist Intelligence Unit, more than twiceas many believed their companies' divestmentswould increase (27 percent) in the next three yearscompared to those who thought they woulddecrease (11 percent).
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Strategy in Action4a company's activities, can and shouldcatalyze a broader examination of wherethe company competes and where it hasthe potential to create lasting strategicadvantage. Understanding why abusiness is worth more to anotherbuyer than it is to the existing ownerscan reveal important insights into the seller's relative strengths andweaknesses. At the same time as askingthemselves why they cannot realizecomparable value from the assets beingput up for sale, companies should alsoexamine what it is about the remainingelements of the business that makesthem more profitable, and use theseinsights to proactively overhaul thegrowth plan. Consumer products leaderSara Lee has pursued a very clearstrategy of refocusing the company on products and markets where it hasdistinctive capabilities that enablesuperior returns. By divesting non-core assets—its 2006 spin-off of Hanesbrands is a good example—SaraLee has created shareholder value andgenerated valuable capital with whichto strengthen its core capabilities infood, beverage, household and personalcare products.Serving Customers MoreEffectively Exiting a business inevitably meansceasing to serve certain customers orchanging the products/services offeredto a customer group. This brings with itthe opportunity to eliminate associatedcosts, and potentially to reinvest inserving the remaining customers inways that are more closely tailored to their distinctive needs.

Examples range from streamlining supply chainsto provide greater responsiveness, tochannel rationalization and sales forcere-organization. Rationalization of thecustomer base can also be a trigger toinvest in new tools or processes thatgenerate better real time customerintelligence. It is an inevitable truth that the morecustomers served and the wider therange of products and services on offer,the greater the likelihood that you will end up "stuck in the middle" withan offer that serves nobody's needsuniquely well. Divestiture thereforecreates the opportunity to back out ofthis situation. As importantly, divestingan old and tired business can create anopportunity for a company to upgradeits brand and make it more relevant tomore attractive, higher-growth customersegments. Food producer ConAgra,which recently sold off its refrigeratedmeats businesses including theButterball and Armour brands, is nowboosting its marketing investments inits strong brands such as HebrewNational hot dogs and its HealthyChoice line of meals.1And through its"Gold Store" initiative, ConAgra isshifting its sales efforts from heavyemphasis on short-term price discountsand couponing toward a more balancedmix of trade spending, consumeradvertising, and product innovation.To make sure it happens, sales-forcecompensation is being tied to thesuccess of these strategies.2Enacting Critical Changes in CultureAny major transaction, whether it's anacquisition, a merger or a divestiture,creates an expectation of change acrossthe entire workforce.

Divestitures therefore offer an ideal opportunity tore-examine the culture of the companyand initiate important changes that willbetter equip it to compete in future.An exit from abusiness, particularlyone which has formeda core part of acompany’s activities,can and should catalyzea broader examinationof where the companycompetes and where it has the potential to create lastingstrategic advantage.1 Conagra Foods to Sell Refrigerated MeatsBusinesses to Smithfield Foods for $575 Million;Sale Includes Butterball, Eckrich and ArmourBrands. http://media.conagrafoods.com/phoenix.zhtml?c=97518&p=irol-newsArticlemedia&ID=889556&highlight=2 ConAgra Shifts Focus to Food Brands, WallStreet Journal, Oct 24, 2006. http://online.wsj.com/article_print/SB116174846168103078.html
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Using Divestitures as a Lever for Change5The sale of a business whose workforcediffers substantially in composition,practices or culture can also eliminatedamaging internal friction and createa buoyant sense of optimism amongthe employees who remain. The use ofculture assessment tools can help tohighlight these differences, and can be used to set and measure progresstowards cultural and behavioral goalsfor the remaining business. Optimizing Back-OfficeFunctionsIt is common in a divestiture for theparent company to continue to supportsome of the divested unit's back-officefunctions for a period of time afterthe sale. As this support is rampeddown, there is often an opportunity fora fundamental redesign of how back-office functions are performed. Thismight include relocating activities totake advantage of labor cost differences,or outsourcing functions entirely. For companies that have survived witha patchwork of outdated and poorlyintegrated systems, a divestiture alsooffers the chance to invest in newsystems that deliver real-timeinformation and insight with which tomanage the business.

For example,siloed systems for financial reporting,accounting, sales, marketing and ordermanagement can be realigned tobetter interface with each other inorder to provide improved service. Adivestiture is also a good time toreorganize the workforce in a newlyflexible organizational structure andto implement new incentive systemsthat benefit the remaining businesses.Other areas for organizational reviewinclude optimization of the legalentity structure for tax purposes.Learning from Best PracticesWhether or not there are opportunitiesto use a divestiture as a lever for broaderchange, there are unquestionably goodand bad practices which companiescan learn from in order to maximizethe value created through the sell-offsor spin-offs. From our work withcompanies across a wide range ofindustries, we have synthesized someof the key learnings below:Invest in High-Quality Program Management A divestiture, particularly of a highlyinterlinked business, spawns multiplework streams that need to be carefullymanaged and coordinated. A properlystaffed program management office iscrucial to setting priorities, trackingprogress and managinginterdependencies.

The absence ofclear central direction can easily leadto lost momentum, poor sequencing of change initiatives and work streamsthat operate at cross-purposes to oneanother. In contrast, high qualityprogram management can help tominimize transaction costs and preservekey capabilities through the process. One of the world's largest providers ofcommunications solutions understoodthese dimensions clearly when it spunoff its consumer premise equipmentbusiness—one of the largest carve-outsin the $15 billion company's history.Key to the program management ofthe divestiture process was anunderstanding of the importance of IT'srole throughout. The communicationsgiant relied on a partner with particularskills in program set-up, detailedmaster planning of all work streams,and governance of the whole process.The company successfully completedthe initial separation in four months,meeting all critical legal, financial andbusiness-continuity requirements.Open Dialogue and Clear Lines of AccountabilityProblems often arise when the sellingcompany and the unit to be divested failto agree on their mutual accountabilityfor making the transaction a success.

This creates risks, including thoseincurred when the parent companytakes shortcuts that threaten futureperformance for the divested company,or when employees of the divestingentity begin to act in ways that aredamaging to the parent's interests.These problems can be mitigated byclearly articulating the responsibilitiesof each organization, maintaining high-quality dialogue through the process,and tracking performance againstwell-defined goals and measures. Communicate—and Communicate MoreDivestitures are often public, high-profile events that can quickly provokespeculation, lost productivity and theloss of key employees.

To avoid suchoutcomes, managers should carefullycraft and initiate a communications planthat identifies different constituencies(internal and external) and deliversspecific targeted messages to each.Employees on both sides of the dealare likely to feel anxiety about theirfuture. Without a steady stream ofinformation that answers the critical"What about me?" questions, skills vitalto the success of the deal may be lostas valuable staff defect. On the positiveside, divestitures can offer opportunitiesto reinforce internal communicationsand reinvigorate morale. After thedecisions have been made about whotransfers to the divested entity and whostays with the selling organization,companies should quickly reinforcetheir messages to employees aboutrecognition and retention, communicatejob redesigns or even solicit employees'help with recruiting talent for theleaner, more focused company.
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BP's Master MoveMany industry observers were caughtoff-guard when BP captured $9 billionin cash by divesting its petrochemicalsunits—up to $2 billion more than WallStreet analysts had expected. Themarkets had been anticipating an IPO,and the energy giant had not tried tocorrect that notion. In crafting the divestiture program,BP's corporate development expertsdefined the major steps needed toseparate and sell the $25 billion-a-year petrochemicals business. First,the unit was carved out as astandalone business under its ownname—Innovene—so it could float onthe New York Stock Exchange.The carve-out, making Innovene theworld's fifth largest petrochemical andpolymer Company, was complicatedenough. BP's dedicated corporatedevelopment team determined the key phases, major milestones, workstreams and project teams needed to deliver the complex divestment.

The whole process involved a detailedassessment of the path to a rapidseparation, accelerating the processby two months and greatly enhancingBP's chances of obtaining the bestpossible valuation in an IPO. As soonas Innovene was legally a separateentity, the priority turned to IPOpreparation, developing the necessarysales presentations for the underwritersand preparing the flotation prospectus.Then the BP team made its move:team members also prepared to woopotential buyers, which meant gettingready for the prospective acquirers'due diligence procedures—a majorwork stream in itself. The multiple-options strategy paid off brilliantly,sparking a successful bid fromspecialty chemicals producer INEOS.The $9 billion deal represented one of the largest-ever leveraged buyoutsand instantly made INEOS one of theworld's largest chemical companies.And BP had completed a hugedivestiture only a year after declaringits intent to sell.Strategy in Action6
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Focus on the Critical Value LeversThe complexities of cross-borderownership, the need to disentangleshared assets or systems, and theexistence of multiple buyers or potentialdeal structures can place a hugeburden on management during thedivestiture process. Amid the noiseand confusion it is easy to becomeobsessed with minutiae and lose sightof the bigger picture. A criticalleadership role in a divestiture musttherefore be to maintain an unerringfocus on the critical value levers ofthe deal—for the good of both buyerand seller. It is also crucial to ensurethat there is clear, dedicated leadershipfor the deal. Veterans of multiplecarve outs often appoint a full-timechampion—an executive sponsor—tospearhead the planning andimplementation of the divestiture. Keep All Options Open As Long As PossibleThere are generally multiple optionsavailable for structuring a divestiture,ranging from different buyers, differentpackages of assets and associatedservices and different transactiont ypes. Given the inherent complexityof the deal, it is tempting to fix on aspecific formula early on and pursue it as the sole option. However, cleverplayers preserve the flexibility to pursuedifferent paths for as long as they canso they can maximize the value thatcan be gained from the deal. This is bestaccomplished by creating a dedicatedtransaction team with pre-definedguidelines for how they negotiate withdifferent potential buyers.

BP's successful 2005 divestiture of itsolefins and derivatives business providesan excellent example of the value ofstaying flexible. The energy company'scorporate development team plannedpublicly for an IPO or a spin-off, butlate in the game the team launched aconcurrent effort to woo a strategicbuyer. (See sidebar)Best Practice in ActionNational Grid (NG) offers a fineexample of divesting done right. NG is one of the world's largest utilities: it owns and operates Great Britain'sgas transmission system, owns the electricity transmission grid in Englandand Wales, and operates the system throughout Great Britain. It alsodistributes electricity in the northeasternUnited States and gas to customers in upstate New York. To achieve its goal of becoming theworld's premier network utility, NGwanted to consolidate its business athome and take advantage of liberalizedenergy markets abroad.

The heavily regulated company decided to explorethe possibility of selling off some ofits gas distribution networks. As theincumbent integrated monopoly gastransporter in Great Britain, NG facedseveral restructuring and regulatoryhurdles, including the need to demonstrate that separating gasdistribution from gas transmission andselling distribution assets to new ownerswould diminish neither safety standardsnor the economic welfare of consumers.In 2002, based on the resultinganalysis, NG decided to proceed withthe sale of four networks. Setting a challenging timetable fordivestiture—a goal that critics doubtedcould be met—NG's management team carefully oversaw all aspects ofthe divestiture, including: creating ablueprint and business architecture for the divested distribution networksas well as for those that NG retained;developing a program-levelimplementation plan; ensuringknowledge transfer with the spun-offnetworks to close any capability gaps;coordinating the cutover process; and communicating with externalstakeholders. Importantly, the NGleaders managed those divestitureinitiatives as part of their overalltransformation mindset, allowing themto maintain simultaneous emphasis on the utility's day-to-day operations. In August 2004, NG announced salesagreements that far exceededexpectations: Buyers had agreed to pay£5.8 billion (US$10.7 billion) for thefour networks, representing 120 percentof the regulatory value of the assetsfive months earlier. NG's stock price hadseen a 20 percent appreciation sincethe announcement that divestmentswere under way. The sales proceedshelped to fund a £2 billion specialdividend to shareholders and improvethe rating of the regular dividend by20 percent, cementing NG's reputationas a solid yield stock.

The transaction also freed up capital,allowing NG to achieve its strategicgoal of investing in new markets thatpromise higher shareholder returns. And,by selling some of its networks, NG hascreated a more compact distributionbusiness in the U.K., allowing it toaccess greater efficiencies and overcomesome previous diseconomies of scale. Accenture believes that companiescan use divestitures not only asopportunities to maximize value butas powerful levers that enable muchmore substantial and long-lastingchange. In short, leading-edgedivestors are thinking transformation,not just transaction. They see a higherand better use for sell-offs and spin-offs. It is a good thing when companiescan offload poorly performingoperations. But it is a far better thingwhen the divestiture is seen as a toolfor helping the original business tomove much faster and further towardenduring high performance. Using Divestitures as a Lever for Change
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Copyright © 2007 AccentureAll rights reserved.Accenture, its logo, and High Performance Deliveredare trademarks of Accenture.About the authorsArt Bert is the global lead partner ofAccenture's Corporate Strategy practice,based in Boston. His experiencecomprises over 19 years across thespectrum of M&A, merger integrationand strategy consulting with Global1000 clients. Art received an MBA fromColumbia University Business Schooland a Bachelor of Engineering fromGeorgia Institute of Technology.Caroline Firstbrook is the lead partnerin Accenture's Corporate Strategypractice for Europe, Africa and theMiddle East. She is based in London.Caroline's 14-year consulting careerincludes a background in corporatestrategy and mergers and acquisitionswhere she has advised seniormanagement across a wide range ofindustries and issues. Caroline has anMBA from Harvard Business Schooland a Bachelor of Engineering fromMcGill University in Montreal.About Accenture StrategyAccenture's Strategy group bringstogether a unique combination ofstrategy and operations experience to help senior executives translateinsights into results at both theenterprise and business unit level. OurStrategy professionals are currentlyworking with half of the Fortune 100companies around the world in thefollowing areas: Transformation,Corporate Strategy, Mergers &Acquisitions, Organization Strategy,Growth & Innovation, Pricing Strategyand IT Strategy & Planning. Workingcollaboratively with top management,we help develop and execute solutionsthat transform organizations and drive sustained high performance. For more information,

visithttp://www.accenture.com/Strategy. About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company. Committed todelivering innovation, Accenturecollaborates with its clients to helpthem become high-performancebusinesses and governments. Withdeep industry and business processexpertise, broad global resources and a proven track record, Accenture canmobilize the right people, skills andtechnologies to help clients improvetheir performance. With approximately146,000 people in 49 countries, thecompany generated net revenues ofUS$16.65 billion for the fiscal yearended Aug. 31, 2006. Its home page is http://www.accenture.com/.