Thanks to the recession, restructuring plans are nearly standard procedure for many public companies these days. Factor in private equity’s considerable stockpile of dry powder and conditions are ripe for a spike in corporate carve-outs by buyout shops.
The examples run the gamut from the dramatic makeover of an American icon General Motors through a Chapter 11 bankruptcy process to tiny biotech companies on their last legs offering up the rights to years of research in exchange for cash. The most recent example of a carve-out target is Dallas-based Zix Corp., which announced on June 11 that it had hired Allen & Co. to review options for maximizing the value of its e-Prescribing drug prescription automation services business.
Frank Hayes, a partner at mid-market firm
“There are plenty of good companies with bad parents out there,” he said.
A broken balance sheet isn’t the only driver for public companies to do these deals. Ernst & Young found that 56% of respondents participating in its 2009 global divestiture survey said that the most important factor in their decision to pursue a divestiture was increasing focus on their core business. The Ernst & Young survey polled 360 executives worldwide in December 2008, more than 75% of which worked at public companies.
Jeffrey Greene, who works in Ernst & Young’s transaction advisory services practice, said that he expects to see a jump in the number of carve-outs, in part, because public companies are raising the bar on strategic fit.
“Any activities that divert management’s attention away from the core business are going to get a hard look,” he said. Today’s higher capital costs are also a factor, he said, as well as a desire to shed non-performing assets to reduce the strain on shared resources, and to re-deploy funds to more profitable uses.
Early June saw a leveraged buyout of this ilk when Kroll Inc., a unit of publicly-traded Marsh & McLennan Cos., completed the sale of its U.S. government security clearance screening business to
Greene said that buyout shops evaluating carve-outs need to think hard about being able to reproduce what the parent company is providing the division or subsidiary. Most divestitures do include some sort of transition service agreement in which the parent company continues to provide support for the divested business, typically for six to 18 months.
Beyond that, the big question to ask is how will removing the infrastructure and influence of the parent company impact the divested business’s bottom line. “You really need to build a stand-alone operating model,” Greene explained.
One trend Greene has been seeing in the United States is for sellers to use third-party advisors to provide detailed due diligence on the assets being shopped. This is typical for carve-outs in Europe, he said, and it is becoming more common here. This vendor due diligence is conceived as a protection for the seller, which is looking to anticipate and address issues bidders could raise. The reports can also be helpful to potential buyers, since they are designed to give an objective perspective on the strengths and weaknesses of the business.