Paul Hammes – Five tips for a successful divestment strategy

Paul Hammes, Divestiture Advisory Services Leader for Transaction Advisory Services, EY

Paul Hammes, Divestiture Advisory Services Leader for Transaction Advisory Services, EY

Companies taking a “wait-and-see” approach to deal-making as economic uncertainty persists may be missing out on growth and value opportunities.

Many companies have looked to divestments to offset cash and credit challenges and to free up capital to drive growth. But this short-term thinking is shifting as companies plan for the long term and take a more strategic approach to divesting.

In a recent EY divestment study that surveyed almost 600 executives, 77 percent said they planned to accelerate divestments within the next two years, and 46 percent are planning to divest in the same time frame. As companies signal an increased appetite for divestitures, it’s important they understand and implement the appropriate steps to achieve greater value for shareholders.

Evidence from our study, combined with our work with clients, has shown that there are five leading practices that companies should follow in order to execute a successful divestment:

Conduct rigorous and regular portfolio management

Review your portfolio regularly. Companies can assess whether assets are contributing to strategic goals or if capital can be better used for other purposes.

Companies that use divestments as a strategic tool to enhance shareholder value or focus on core business strategies, rather than considering them as a reactive move to free up cash or pay down debt, tend to improve their divestment results.

Consider the full range of potential buyers

There is an intense amount of competition from buyers today for good, high-quality assets and they’re ready to transact. Appealing to a broad group of buyers can garner a price that exceeds expectations.

Companies should think about the buyer universe for a potential asset sale differently than they might have in the past, considering potential foreign buyers, buyers within different sectors and private equity firms. Each buyer may have different information needs that require a different planning process.

Articulate a compelling value and growth story

Sellers should provide tailored information about how an asset fits with the buyer’s business to help achieve strategic objectives. Develop an M&A plan for the asset or provide a view of synergy opportunities to buyers.

Prepare rigorously

Effective ongoing preparation can instill buyer confidence. As a result, companies can better control the process and realize greater speed and value. Half of the executives surveyed admit that certain changes to the preparation process could have made a significant difference during divestment.

Understand the importance of separation planning

Probably the most crucial aspect of a divestment is separation planning, yet 56 percent of respondents identified a clear separation road map as the most complex part of the divestment.

Other separation challenges include decisions regarding the completion mechanism, tax planning, estimating stand-alone costs and negotiating transition services agreements.

Every day a company waits to evaluate its capital strategy, someone else is making a change and gaining an advantage.

In heeding these five key practices, companies can take a more strategic and ultimately successful approach to divestments to ensure they get the most value possible and grow the bottom line.

Paul Hammes is the Divestiture Advisory Services Leader for Transaction Advisory Services at EY. Reach him at www.ey.com.

Is it time for you to optimize? Check out these strategies to help you maximize your firm’s patents

Michelle Rakiec, managing director, AdValum Consulting

Michelle Rakiec, managing director, AdValum Consulting

 

Stevan Porter, managing director, AdValum Consulting

Stevan Porter, managing director, AdValum Consulting

How can your company improve its business results? One way is by optimizing your firm’s use of patents. The right strategies for leveraging patent properties can provide long-term advantages and a leg up on the competition.

The following strategies are useful starting points for enhancing business outcomes through patents:

Consider patents’ financial qualities

The same analytical constructs that apply to financial asset management can be applied to patent management. When managing financial assets, it is prudent to consider things like expected future cash flows, return on investment and relative risk profile. Understanding this information helps businesses with limited resources to select the most profitable investments and manage risk.

Likewise, expected cash flows from internal commercialization of a patent or out-licensing royalties can be forecast, returns on patent research and development investments measured, and relative risk profiles of patents assessed. By considering these financial characteristics associated with their patents, companies can make better decisions and optimize value.

Understanding patents’ financial qualities, for instance, can shed light on which monetization route — commercialization, licensing or sale — is most desirable for a given patent or group of patents. It can also help a company strategically leverage its operations to support patent value and vice versa.

Recognize the risk profile of patents

All assets, including patents, carry risk. Importantly, the type and level of risks in patents vary according to a patents’ economic life, the technology it discloses and the industries touched by the technology. For example, certain patents in fast-moving industries may carry the risk of rapid technological obsolescence, while other patents’ technologies may face uncertain or very slow market adoption.

Holding several patents that relate to a steadily selling product may suggest financial stability but also may imply a high level of risk concentration since several patents’ values may be impacted by a single product’s market performance.

Evaluating risks associated with patents can lay the foundation for comparative risk analysis and superior strategy planning. By understanding the relative risk levels of patents in a given portfolio and how those risks align or differ from broader business risks, companies can efficiently diversify.

Effective diversification of a patent portfolio can be achieved by holding the right mix of patents and by utilizing the proper combination of monetization techniques for those patents. Notably, effective patent risk management can be done without straying from a firm’s core competencies since even patents with similar technological profiles may have substantially dissimilar risk profiles.

Execute strategic patent transactions with care

Due diligence in executing patent deals should be analytics-based, and care should be given to the broader business implications of any transaction. In this regard, appropriate qualitative and quantitative analysis should be deployed. Proper evaluation can help parties maximize value obtained through a transaction and ensure any deal comports with prevailing strategic initiatives, financial goals and desired competitive positioning.

Factors that should be considered in executing any patent deal include the following:

■  Values paid or received by others for comparable technologies.

■  Alternatives to reaching an agreement, including design-around cost/benefit analysis and assessment of the risk-adjusted outcomes of not executing a transaction.

■  Immediate and subsequent financial benefits, such as cash flow, “option” value and defensive patent aggregation security.

■  Possibilities for using the patent deal to foster broader strategic relationships or forestall undesirable competitor activity.

■  Value and risk implications of the contemplated deal on other patents in a portfolio.

When managed carefully and used cleverly, patents can be especially powerful tools for a business to enhance its bottom line. The right patent strategy can offer an excellent path to improved business results.

Michelle Rakiec and Stevan Porter are managing directors at AdValum Consulting, a premier provider of expert economic consulting services located in Chicago. They specialize in strategy, valuation and damages analysis in intellectual property matters. Rakiec and Porter can be contacted at (312) 623-3351 or [email protected] and [email protected], respectively.

Emerson Electric to step up acquisitions and divestitures

ST. LOUIS – Industrial conglomerate Emerson Electric Co. expects to step up both acquisitions and divestitures in the next four years and will increase investments in technology and emerging markets amid recession in Europe and slower growth in the United States and China.

The maker of factory automation systems and technology used in oil and gas production trimmed its long-term sales forecast to a range of $31 billion to $35 billion annually. A year ago, the bottom end of the range was $32 billion.

The company said it expects 2012 sales to reach $25 billion, helped by growth in its home market, including a bounceback in housing and commercial construction. It said its backlog and other metrics suggest revenue growth will be stronger in the second half than in the first half.

“China is still weak but will come back … Europe is in a recession,” Chief Executive David Farr said. “The key market for us will be the U.S.”

Farr said he expects emerging markets to account for the bulk of Emerson’s growth between now and 2015, and the company will step up investments there and in technology.

Emerson expects to spend $5 billion to $6 billion on acquisitions between now and 2015, he said, especially in industrial automation and process management segments. Emerson will divest $2 billion to $3 billion of assets in that period, including its Knaack storage equipment unit, Farr said.

Such moves were a response to “more challenging” markets, he said, with uneven economic growth, mergers among its customers and an uncertain outlook for debt-laden developed markets.

“We’re going to drive our growth,” Farr said. “We can’t sit back on our ass and wait for it to come to us.”

Farr, who has led the industrial conglomerate since 2000, is known for blunt commentary on the markets where Emerson does business. Last year, he was among the first to identify a likely European recession. Emerson investors and analysts consider the company one of the best-run U.S. manufacturers.

Emerson shares were down 2.9 percent at $51.28 in morning trade on the New York Stock Exchange.

Inernational Paper-Temple Inland deal gets U.S. antitrust OK

MEMPHIS, Tenn. – International Paper Co. won U.S. antitrust approval to acquire rival Temple-Inland Inc on the condition that they divest three mills that make paper for corrugated boxes, the U.S. Justice Department said on Friday.

Without the divestitures, the combined company would have had control of 37 percent of the North American capacity for containerboard, which is used to make corrugated boxes, the department said.

Under a consent decree, Temple-Inland will sell its mills in Waverly, Tenn., and Ontario, Calif., and International Paper will divest either its mill in Oxnard, Calif., or one in Henderson, Ky.

“With the mill divestitures, the transaction can proceed and American consumers and businesses across the country can be assured that competition is preserved in this important industry that is vital to the U.S. economy,” said Sharis Pozen, the acting head of the Justice Department’s antitrust division.

Temple-Inland agreed to be acquired in September after International Paper sweetened its offer to $3.7 billion.