The Journal. Preparing the ground for successful divestment. Banking and Capital Markets. November 2009

Transcription

1 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 1 Banking and Capital Markets The Journal November 2009

2 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 2 2 PricewaterhouseCoopers The Journal Divestment is gathering pace as many financial institutions revise their strategic priorities and seek to strengthen their capital position. Some larger groups are also restructuring their businesses to comply with European Commission state aid and competition rules. Damian Guly, Len Sinclair and Matthew Phillips outline some of the key preparations for sale and operational separation that will help to improve the chances of a successful deal and ensure the divestment supports the group s long-term strategy. Damian Guly PricewaterhouseCoopers (UK) damian.guly@uk.pwc.com Leonard Sinclair PricewaterhouseCoopers (UK) leonard.m.sinclair@uk.pwc.com Matthew Phillips PricewaterhouseCoopers (China) matthew.phillips@cn.pwc.com 1 Chairman s Statement from Barclays PLC General Meeting Strategic review announced in RBS Annual Results RBS media release RBS media release RBS media release Update on strategy: Taking ING back to basics, ING media release ING media release ING media release ING media release Lloyd s TSB media release ING media release and RBS media release The fire-fighting that dominated so many board agendas over the past year has been gradually giving way to a longer term strategic reappraisal as institutions consider where and how they can most effectively compete in the new business, investment and regulatory environment that is emerging from the financial crisis. The resulting restructuring is likely to include extensive sales of non-core businesses as groups seek to bolster balance sheets and streamline control structures. Many companies are also looking to divestment to help create a more sustainable balance between risk and reward within their organisations and enable them to concentrate financial and management resources on areas with the strongest market leadership potential. Notable transactions include the sale of Barclays Global Investors (BGI) to Blackrock which, according to Marcus Agius, Chairman of Barclays, will reinforce our capital position at a time when additional capital resources are highly valued by the market. 1 The deal also reflects what Mr Agius described as the changing nature of the competitive dynamics in the asset management industry. The industry is moving increasingly towards independent, that is, non bank-owned, asset managers, partly driven by growing regulation of the relationship between investment banking and investment management and partly by client demand. Divestment has been given further impetus by the announcements in November 2009 that some of the groups which have received significant government funding will be required to sell off certain assets to fall into line with EC state aid and competition rules. One of the affected groups is The Royal Bank of Scotland (RBS) which had already carried out a strategic review aimed at enabling the group to concentrate on enduring customer franchises, with top-tier competitive potential 2 (divestments to date have included the sale of part of its Asian banking operations to ANZ 3 ). Its agreement with the EC includes the sale of its insurance division 4, RBS Insurance, a business of significant size in its own right and which was previously put up for sale in mid The agreement in principle reached with the EC is clearly more material for the structure of our group than we had hoped, increasing risk to both execution of the [Strategic] Plan and earnings dilution, said Stephen Hester, CEO of RBS. 5 In April 2009, ING announced its intention to go back to basics by streamlining the company and reducing complexity. This includes the

3 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 3 PricewaterhouseCoopers The Journal 3 sale of a group of smaller businesses with no clear outlook for market leadership and which consume a disproportionate amount of capital. 6 ING s recent divestments have included the sale of its life insurance and wealth management venture in Australia and New Zealand to ANZ 7 and an agreement to sell its Swiss private banking business to Julius Baer. 8 Subsequently, in line with the EC rulings, ING reached an agreement with the EC in November 2009 to separate its banking and insurance operations. The widespread demand for greater simplicity, reliability and transparency has made a split the optimal course of action, said Jan Hommen, CEO of ING 9, Among the other groups that have announced restructuring plans is Lloyds TSB, which has agreed to reduce its shares of the UK mortgage and current account markets through the divestment of a range of assets including much of its Cheltenham & Gloucester operation. 10 Market environment Despite the rally in stock markets and pick-up in certain areas of business, returns and share prices within the financial services sector are still well below pre-crisis levels. These value considerations are contributing to greater price equilibrium and hence increased interest from prospective buyers. Recent months have also seen a growing recognition among sellers that the potential release of capital and reduction in management distraction that might result from a well-executed disposal could be important factors for consideration alongside the realised deal price. Many sellers are keeping the means of divestment open as they seek to enhance strategic flexibility and maximise value. For example, both RBS and ING have stated that deals Figure 1: Key factors for a successful disposal Select advisers to fit your needs Establish clear communication Understand the impact of the disposal on the Group Identify and resolve issues early on Source: PricewaterhouseCoopers may be executed through IPO, agreed sale or combinations thereof. 11 However, following the aggressive acquisition that marked the earlier part of the decade, the shift to divestment represents what many commentators see as largely uncharted territory for many financial institutions. Sellers not only need to attract interest from buyers in the face of limited available finance for acquisitions, they must also consider how any disposal might affect their balance sheet and ability to meet strategic objectives. The demands of deal execution can also place significant strains on already overstretched senior management teams, especially if firms fail to put in place an effective framework for delegation, decision making and oversight. These challenges are compounded by the continuing market uncertainty over the full extent of the losses resulting from the crisis. Sellers could find themselves on the back foot if they have not prepared or do not make available the relevant information to Have a clearly defined strategy Successful divestment / disposal Control the pace and direction of the disposal Put in place Group policies and procedures Optimise the blend of business unit execution with central control Involve the right people Understand the value of the business and the deal value drivers answer buyer queries, with any lack of transparency likely to result in a discount in the bid price or even failure of the deal. A common difficulty faced by companies seeking to sell offshore entities, many of which cut across different territories, is that the central or regional management teams may have limited hands-on local knowledge of the businesses. They may therefore be ill-prepared for the barrage of detailed questions they could face from today s increasingly sophisticated (and sceptical) buyers. So how can sellers boost their chances of success? Although each transaction has certain unique characteristics, our experience of working with both buyers and sellers indicates that there are a number of measures that can help to maximise deal value, while minimising the potential for delay and disruption (as outlined in Figure 1).

4 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 4 4 PricewaterhouseCoopers The Journal Key factors for a successful disposal Have a clearly defined strategy Any deal, be it acquisition or divestment, should support the group s long-term strategy. Some companies may still be reviewing the strategic options that are likely to affect the future make-up of their business and should therefore wait until these issues have been resolved before embarking on a large-scale disposal programme. Once the overall direction is agreed, they can distinguish the core businesses that are critical to the delivery of future objectives from the peripheral operations that can be put up for sale. Before starting each deal, it is important to gauge whether the strategy still holds true, for example if market conditions have changed such that the disposal no longer makes sense. Put in place group policies and procedures Firm governance is critical. This includes ensuring that deal identification, valuation and execution draw on an appropriate supply of data and analysis to allow for informed decisions and are subject to an agreed group-wide framework for oversight and approval. It is also important to consult with all relevant departments such as group tax and risk management at an early stage to ensure the full spectrum of risks are considered before engaging advisers and entering into discussions with potential buyers. Optimise the blend of business unit execution with central control Ultimate authority should rest with group management to ensure any transaction supports the overall strategy. A number of groups have established a small executive deal committee to provide high-level oversight (perhaps three to six people including the CFO, Head of Strategy etc) and a central M&A team to lead day-to-day execution in areas such as price validation, negotiation and communication. While deferring approval to the executive committee, business units can offer all-important local knowledge, relationships and resources to help set up and deliver the transaction. This could include identifying partners for a private bilateral deal that avoids the need for a time-consuming public auction. Involve the right people With so many parties involved in what is likely to be a high-pressure environment, it is important to establish clear allocation of responsibilities from the outset. For the best results, central deal teams should identify and train deal champions within business units, who can develop experience over multiple transactions. It is important to consider when the most appropriate point to involve business unit management would be and how they are likely to react to the deal. Understand the value of the business and the deal value drivers Independent evaluation can help to create a better understanding of how value is generated within the entity and any circumstances that may affect this, such as business being dependent on referrals from the group. This analysis can then be used to target potential buyers, highlight the upsides, such as possible synergies, and quantify the price. It is particularly important to be realistic about what sort of buyers would want a specific asset. For instance, some holdings may not be

5 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 5 PricewaterhouseCoopers The Journal 5 broadly attractive enough to merit a public auction and would therefore be better marketed to an identified target as part of a proprietary sales process. It is also useful to consider the value implications of different transaction structures. For example, could a higher price be gained by providing a funding line to potential financial buyers, or could innovative deal structures such as asset swaps or joint ventures deliver greater value? Control the pace and direction of the disposal Vendor due diligence (VDD) could be especially beneficial in giving the seller an early indication of any issues that could affect the sale and in providing a consistent set of data upon which to base the bidding process and subsequent negotiation. Such reports should be thorough and objective enough to provide genuine comfort for buyers and sellers. Setting a clear timeline and monitoring progress against milestones can then help to maintain control and competitive tension. Sellers might also consider how to retain control of the legal process by preparing and circulating a draft sale and purchase agreement and aiming for a clean exit that minimises indemnities, representations and warranties. The potential re-opening of the IPO market could provide the benefit of greater flexibility in divestment options. By keeping all options open, sellers are able to further enhance competitive tension and move quickly to adapt to and realise deal opportunities as they arise. A dual track process (VDD and IPO) could help sellers to make the most of this flexibility, leveraging the commonality between the two exercises (both in terms of outputs, e.g. long form/vdd reports, and process, e.g. robust and accessible information). Identify and resolve issues early on Sellers risk losing the initiative if they allow potential buyers to surprise them with unforeseen issues identified in the buyer s due diligence. It is therefore essential to have a process in place to identify any potential snags before entering into negotiations and, where remediation is not possible, to be open about the issues and their implications. Information should be carefully screened, cleansed and reconciled before entering the data room and a process put in place to respond to buyers questions and requests. Understand the impact of the disposal on the group Divestments present a range of accounting issues. Areas to consider include whether the deal will generate a surplus or crystallise losses, along with unexpected outcomes such as triggering an impairment review of goodwill assets retained by the group. While the capital position may be improved by proceeds from the sale, firms will need to take account of possible tax issues such as capital gains or the crystallisation of deferred tax payables. Outsourcing, rationalisation, IT development and changes in regulation make operational separation an increasingly complex and challenging area of divestment. In separating the business, it is important to consider how much this will cost and whether transitional services may need to be provided, and if so at what price. It will also be necessary to assess the stranded costs, such as shared overheads that may need to be allocated over a smaller operational base and, over time, eliminated (see box). Keys to effective operational separation In recent years, there has been a considerable focus on delivering value through effective post-merger integration. Yet, while critical to deal value, the efficient management of the operational aspects of divestment are less well understood. Key requirements include: Creating certainty over ongoing and one-off separation costs; Clarifying investment requirements to build a sustainable operating model following the sale this will be a key buyer issue; Developing clear and achievable separation plans. This includes the right balance of transitional support to ensure continuity for the buyer while minimising costs and business disruption for the seller; Ensuring that carve out and separation planning, including people and change issues, are started early in the deal cycle; and Creating a clear and efficient operating model (parent and divested business). This includes taking the opportunity to challenge the existing operating structures, cost base and procedures to drive out additional value.

6 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 6 6 PricewaterhouseCoopers The Journal However, planning for the carve out is often left until late in the deal process as the focus generally centres on the financial aspects of the transaction. This can lead to an overhasty approach to separation, which will inevitably heighten the operational risks, erode deal value and miss the chance to use the divestment as an opportunity to challenge and enhance the existing operating model. One of the ways sellers often come unstuck is by not addressing the issues relating to the transfer of assets and securing the necessary depositor consents early enough. This can be an especially difficult area when dealing with structured products, many of which may be bifurcated and booked in different locations. From as early as possible, it is therefore essential to develop a clear understanding of the true cost of separation, the issues it presents, the transitional arrangements that may be required by the buyer and the impact on the seller s operations. In this way, management can ensure that the business has a functioning operational infrastructure and address the questions that bidders are likely to raise. While some buyers may wish to use their own platforms and processes, there are a large number of potential buyers that may need to develop the necessary infrastructure to support the acquired business, which can have a significant impact on deal value. In negotiating the transitional arrangements it is important to balance the buyer s desire to reduce execution risk by taking advantage of support from the seller for as long as possible with the seller s desire to exit as soon as feasible. Knowing how much pressure can be applied to drive their integration timetable requires careful thought and understanding. People issues can also be overlooked or left until too late in the separation process. The people who are critical to successful divestment or who are key assets to the buyer are often those most affected by the sale, at a personal level. Keeping these personnel informed and addressing any concerns and uncertainties as part of the operational planning are therefore critical. Sellers might consider appropriate incentives to help engage and motivate management and staff in the business being divested, if it enhances the value of the sale. Failing to address the operational aspects of separation early enough can leave considerable value on the table. Separation plans tend to concentrate primarily on practical issues rather than exploring how the transition can generate additional value for the seller. Challenging the operating model within both the retained and divested entity before the sale and seeking out operational efficiencies can optimise the core business and boost the sale price. These upside opportunities can be significant, even in the most efficient groups. Establish clear communication A clear communication strategy is essential in explaining the rationale of the deal and securing support from internal and external stakeholders. This includes appointing and briefing appropriate individuals to be responsible for media relations and other key communications. Wherever possible, parties involved should get the information they need, when they need it, in order to make informed decisions. There may need to be some confidentiality in the initial stages, for example to avoid staff defections. However, leaks and rumours may still arise and it is important to have a plan to address this. Select advisers to fit your needs Such factors as specific sector experience, depth of resources and the ability to respond quickly will all be important in choosing advisers. Depending on the size and nature of the deal, other considerations might include a global footprint and the ability to offer a dedicated team. Take the initiative As divestment gathers pace, being suitably prepared and ready to respond when opportunities arise will be critical to success. A well-defined strategy, a solid basis of consistent data and a clear framework for decision making and execution will enable sellers to identify any target buyers who could benefit from the strategic fit offered by a particular business and hence open up the possibility of a bilateral deal. If they opt for an open auction, the firm foundations of strategic coherence, transparency and control can help to attract interest and sustain the momentum of the transaction. Without these foundations, sellers are at risk of losing buyer confidence and undermining the value, timing and even resolution of the deal. Many groups will already have some of the necessary structures in place through their existing strategy and M&A teams. The key will be ensuring that any disposal forms part of the wider business strategy, anticipating and addressing any issues that could affect the deal within today s uncertain market and ensuring that key personnel have all the data and analysis they need to make informed and assured decisions.

7 PwC Journal Nov 09:Successful divestment 21/12/ :48 Page 7 PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. This article has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this article, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it. For information on the PricewaterhouseCoopers Journal marketing programme please contact Susan Carpenito, Senior Marketing Manager, Global Banking and Capital Markets, PricewaterhouseCoopers (US) on +1 (646) or at susan.carpenito@us.pwc.com For hard copies please contact Russell Bishop at PricewaterhouseCoopers (UK) at russell.p.bishop@uk.pwc.com

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