A new report has revealed how increasingly difficult it is becoming for companies in the industrial products sector to sell a business.
The international study from Eversheds law firm, Streamlining for Success, highlights the difficulties businesses are facing at every stage of the divestment process.
The findings come at a time when there is a greater focus on divestment activity – a trend that is backed up by the findings of the report. Almost one in five (18%) respondents in the industrial products sector said their M&A strategy was focussed on divestments.
However, the study examines how changes in the commercial and regulatory landscape have made deals less certain and more complex, with divestments taking longer to complete. Most companies spend an average of three to six months on a routine deal, increasing to one to two years for larger, more complex transactions.
The study reveals the most common problematic area of a divestment in the industrial products sector was avoiding post-sale product liabilities. The potential for historical claims to be made against a business unit often became a sticking point in negotiations or was a deal breaker. This has led to a greater focus on contractual issues, with legal teams playing a more important role in the sales process than was typical for other market sectors.
When it came to selling, with large infrastructure and government contracts at stake, finding reputable buyers that would be capable of operating the asset effectively following disposal was the most important factor for respondents in the industrial products sector. While this concern with buyer reputation was shared by other market sectors, particularly in financial services, sellers in the industrial products sector stood out for their interest in finding a buyer that would be able to successfully integrate and achieve synergies from the asset.
With typically well-integrated or centralised businesses, identifying and separating assets was seen as difficult in the industrial products sector. IT separation and transfer, centralised finances and crossover of employee and management function emerged from the report as particularly problematic areas. Respondents highlighted how the lack of integration between a business’ legal, IT and commercial personnel makes it difficult to identify potential issues in this area, leading to delays and post-closure issues.
A number of respondents said that agreeing on internal timelines and synchronising teams within the company was often key to a successful divestment in the industrial products sector.
Robin Johnson, partner and co-chair of the cross border M&A team at Eversheds law firm, said: “Put simply, breaking up is becoming much harder to do. Separating assets is increasingly complicated in the industrial products sector due to the centralised nature of many organisations. 2015-2017 is likely to see more separations as C-suite executives look for better returns on capital ratios. Deal teams must have the opportunity to prepare their businesses for the challenges they face on complicated divestments. This requires a much closer working relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations team executing the commercial transaction and separation plans – a point that came through very clearly from the businesses involved in the study.
“It is clear from the report that businesses in the sector need to look closely at their current processes around managing divestments to ensure they maximise the benefit of such deals, rather than tying themselves up in separation knots further down the line which could have been avoided at an earlier stage.”