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The financial buyer's win-win.

Although the merger and acquisition boom of the 1980s has largely subsided, many public corporations have put "for sale" signs on one or more of their operating units. They have done so for two principal reasons:

* They have determined - often after pursuing diversification strategies with mixed results - that long-term shareholder value is best built by focusing resources on core businesses and competencies.

* They see divestiture as an excellent way to monetize past investments in successful but non-core operating units.

But to whom should a corporation sell its non-core units? If the unit has a strong market position and solid product line, there may be considerable interest among would-be strategic acquirers. From such a buyer's standpoint, what better way to build one's customer base, market share, or product line with maximum speed and cost-efficiency?

Nevertheless, an increasing number of sellers are opting not to sell to such strategic buyers, preferring instead to deal with financial buyers whose interest in the unit is based on its growth potential and investment value as a stand-alone enterprise, not its strategic fit with the acquirer's existing businesses. And it's not hard to see why.

First a bona fide strategic buyer - like any other would-be acquirer - will generally undertake a duediligence process beginning even before a purchase agreement is signed and continuing until the transaction is consummated. This process involves the close examination of every aspect of the unit being sold: its financial condition, customer relationships, trade secrets, and business strategy. Such information is theoretically protected by non-disclosure agreements. But if, as often occurs, the transaction does not close, it is hard to imagine how an ex-suitor could "unlearn" all the information and fail to use it, consciously or inadvertently, to its own competitive advantage.

Second, if the would-be strategic buyer (or seller) is a public company, the purchase agreement is usually disclosable, with the announcement coming weeks or months before the actual closing. In the interim, every competitor of the unit to be sold will do its best to plant fear, uncertainty, and doubt in the minds of the unit's customers and suppliers - leading to the potential erosion of both of these key constituencies. Some customers may also give third parties a portion of the business they had divided between the buyer and the seller, just to avoid excessive dependence on a single, newly merged vendor. If the transaction is not consummated, the business will have been damaged by this loss of customers.

Perhaps most important, it is common for strategic buyers to pare "redundant" employees of acquired units post-closing. Word of a unit's pending sale to such a buyer often results in the unwanted departure of many of its best employees, who would rather guarantee themselves a "soft landing" elsewhere than wait around to see whether they have a place and future in the post-acquisition organization. Needless to say, if the acquired unit is severely pruned post-closing, the negative impact on its workers, on local communities, and on the seller's public image as a good, caring employer (even in its remaining core business units) can all be significant.

|Overnight Change'

If, however, the purchaser of a divested unit is a financial rather than strategic buyer, most of these issues completely disappear. If the unit goes forward as a stand-alone company, most of its people will probably be needed more than ever. It may create additional jobs to handle tasks previously performed by the corporate parent. The unit may change overnight from a non-core subsidiary to an independent, entrepreneurial enterprise, with the mandate and the resources to prosper.

The key managers of the enterprise, far from heading for the exits or resisting the unit's sale, may actively welcome it - particularly if they are offered a chance to reap entrepreneurial rewards if the enterprise succeeds. Also, our experience is that these enterprises blossom when it is communicated to these managers that their business is the primary focus of our investment (rather than secondary to other businesses) and that they will be supplied with the proper incentives and resources to build that business.

As more diversified U.S. companies recognize the benefits of focusing on core businesses, of divesting non-core units, and of considering financial as well as strategic buyers, we expect the number of such transactions to increase steadily.

As that occurs, it will be a win-win proposition for all concerned: the seller and its shareholders, the buyer and its investment partners, and the divested units' customers, suppliers, managers, and employees. It is also a good way to transform solid but slow-growth corporate outposts into the fast-growth, job-generating, wealth-creating businesses of tomorrow.
COPYRIGHT 1993 Directors and Boards
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Muse, John R.
Publication:Directors & Boards
Date:Jan 1, 1993
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