Originally Published MX January/February
2002
TOPSPIN
Managing a Business Divestiture
When selling
a business unit, company leaders must be prepared to address the concerns of
all stakeholders at once—beginning with those of employees.
Paul Touhey
The decision to sell a business, the assets or a division of a business, or a wholly owned subsidiary company, is never one that corporate executives make trivially or take lightly. Companies divest and sell assets for various reasons dictated by market realities, including the need to raise cash or to focus on opportunities for a higher return on investment, or the understanding that an asset might perform better under different ownership.
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Paul
Touhey is senior vice president at Fujirebio Diagnostics Inc. (Malvern,
PA) and chairman of the Medical Device Manufacturers Association (Washington,
DC), an industry trade association.
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Businesses are often divested when corporate leaders determine that they no longer fit with the future vision of the enterprise or, in the case of an acquired business, that the initial acquisition was a mistake. Many times the decision to divest comes as the result of a normal process of screening a product-line or business portfolio, evaluating the original reasons for entering that business, and deciding whether those initial judgments still hold up. Such a process is somewhat like screening a personal investment portfolio to determine whether the original rationale for investing in a stock is still operative.
Just as individual investors might like to keep all the stocks in their portfolios, companies would typically prefer to keep all of their businesses and product lines. In some cases, however, maintaining such investments no longer makes sense. Corporate leaders might determine, for example, that a division’s current management team is ineffective, that its prospects for growth have been reduced, or simply that the parent company should no longer be in that business. For any of these reasons, or others, corporate management may ultimately decide that the best business strategy is to divest itself of some part of its corporate assets.
The next step in the divestiture process is for company leaders to determine the extent of the planned divestiture. Depending on the reasons behind the decision to sell, a company that has decided to “pursue strategic options” may have a variety of such options at its disposal. The most obvious option is to sell a business in its entirety. In some cases, a complete business may be sold to insiders already familiar with its operation—that is, to its current managers—in a management buyout facilitated by current ownership. Another option is to sell a portion of the business to other investors, including the public. In this way, the company maintains a piece of the action and continues to participate in the business on a reduced scale.
Having experienced several divestitures, both in junior-level and management positions, I believe there are some areas that are especially important for medtech executives to consider. This article looks at these critical areas with special reference to the most recent divestiture in which I participated.
Everything at
Once
When executing the sale of a business, company executives daily undertake a
variety of decisions that can profoundly affect employees, the families of employees,
and the overall health of the business. Other stakeholders affected by such
a divestiture may include investors, shareholders, corporate partners whose
business may rely on products manufactured by the business unit being sold,
customers, and end-users. Each of these groups may have its own set of concerns
about the sale of the business, and more likely than not each will work in its
own interests without regard for the decisions of management.
Company executives will not lack for feedback about how they are doing. Company
stakeholders—including employees, customers, investors, and possible acquirers—will
immediately grade the executive team’s planning prior to the announcement
of the divestiture. Moreover, they will continue to grade the performance of
company leaders throughout the sale process, thereby exerting pressures that
can be difficult to withstand.
In the face of such influences, it is best for the executive team to remember
that its primary interest must be to protect the business. The best way to accomplish
this goal is for company leaders to develop a sound divestiture plan. By doing
so, they will also have protected all of the company’s constituencies.
Moreover, by remembering that its primary function is to protect the business,
management is more likely to correctly prioritize actions that must be taken
during the course of a sale.
Nevertheless, the executive team must be prepared to address the concerns of
all stakeholders at once. Customer needs should be addressed simultaneously
with employee concerns. The interests of investors should be considered at the
same time as those of end-users. Dealing with such potentially competing interests
requires that company leaders be able to triage their decision making on important
issues.
The first step toward triaging decisions should be for company managers to imagine
themselves in the place of the company’s various stakeholders—beginning
with employees. Employees are by far the most critical group of stakeholders,
because they will inevitably tell all others how they have been treated during
the divestiture process. That information can have a direct impact on the success
of the transaction. If management and employees are seen to be working as one
to effect a smooth transfer of ownership, the interests of investors, shareholders,
and customers alike will be well served.
Retaining Customer
Loyalty
Company leaders who do not clearly communicate divestiture plans to their customers
can be very certain that they will hear from those customers in short order.
The company’s customers will quickly assess the impact of the divestiture
on their business and will make plans accordingly. Some of these may not be
in the best interests of the company or the business unit being divested.
To retain the loyalty of existing customers, it is therefore essential that
company leaders present them with a professional, polished, and well-thought-out
description of the divestiture plan. An ill-defined or poorly reasoned communication
will, at a minimum, devalue the business and reduce its ability to maintain
its cachet and robustness while the sale is in progress. By contrast, even if
the impending change of ownership is not initially welcomed, a clear and carefully
defined plan—with commitments and deliverables—stands a good chance
of gaining customer acceptance.
To a great extent, the days immediately following the announcement of a divestiture
determine the degree of a transaction’s success or failure. During this
time, the executives in charge of customer relations must meet face-to-face
with key accounts to explain the divestiture plan and convey the message that
the management group remains committed to meeting customers’ needs.
Selection of the executives responsible for communicating management’s
strategy should be undertaken with some care. Ideally, the persons selected
should have not only significant communication skills, but also acknowledged
credibility among the audiences with which they will be communicating. A vice
president of sales and marketing whose tenure in that position has been very
short, for instance, may lack the relationships with customers necessary to
credibly convey the divestiture plan.
In nearly every case, there will be at least some customers or other stakeholders
who are inclined to view the sale of a business in a negative light. Effectively
communicating with those who see management’s plan as bad news requires
an ability to carefully control the tenor of the message. Those who are selected
to communicate with such potentially troublesome stakeholders should be judged
especially on their fitness for this responsibility.
Focus on Employees
It has become cliché for company management to declare that the number
one focus of their business is to serve its customers. However true this may
be in the normal course of business, the circumstances of a business divestiture
present special conditions that company leaders must consider if they intend
to continue serving customers.
Once the decision to sell an asset is publicly announced, the immediate reaction
from employees is often one of severe anxiety. Such a reaction is understandable.
The sale of a business has the potential to disrupt the lives and future plans
of employees and their families in a variety of ways. In some cases employees
may be merely inconvenienced, as when vacation plans or schedules must be altered.
But in other instances the effects can be truly life changing, for example when
employees must postpone the purchase of a home or restrict a child’s choice
of college.
Left unchecked, employee anxiety over such issues can become not merely a preoccupation,
but a debilitating force. Employees who are left on their own to deal with such
serious issues can rapidly lose the ability to focus on their work, thereby
placing the day-to-day quality performance of the company in jeopardy.
Even when company executives have determined that the business being divested
is no longer useful as part of the parent company’s business strategy,
employee distraction and declining morale should be matters of serious concern.
This is especially the case when the business being sold is profitable and its
products are in demand. In order to maintain the value of such a business, company
leaders must then take special measures to meet customer needs and ensure customer
satisfaction.
The best way for company management to ensure that a business divestiture does
not compromise product quality or create dissatisfaction among customers is
to minimize the stresses and distractions being experienced by the company’s
employees. Managers who go the extra mile to address employee concerns swiftly,
clearly, and honestly will find that they have simultaneously eliminated a number
of potential causes of customer dissatisfaction and protected the value of the
company. Cultivating such a focus on employee concerns may be, in fact, the
most important responsibility of company management at this critical juncture.
Company leaders can begin this process by putting themselves in the place of
the affected employees and imagining the questions that they would have in that
situation. The management team should then convene a meeting of all the affected
employees to announce and explain the divestiture plan, ensuring that the presentation
addresses as many employee questions as possible.
Soon afterward (the next day if possible) the management team should meet with
affected employees in smaller departmental groups. The purposes of these meetings
should be strictly limited to explaining details of the divestiture plan, answering
further employee questions, and conveying assurances. Since the first day’s
meeting will have shaken the priorities of virtually everyone in the room, the
idea of getting any work done should be considered secondary. At this stage
of the process, employees will be justifiably unreceptive to a discussion of
future productivity, budgets, or goals. Such topics should be avoided at these
meetings.
The Centocor
Divestiture
The importance of focusing on employees was brought home to me during my most
recent experience with divestiture, which involved the sale of the diagnostics
division of Centocor Inc. (Malvern, PA), a high-profile pharmaceutical manufacturer.
Although the diagnostics business was no longer within the strategic vision
of the corporate parent, Centocor’s diagnostics division was a profitable
business unit. It was therefore imperative that management keep the business
humming along while the sale took place, even though it was expected that the
division might be sold to an entity interested in moving it, possibly even overseas.
To deal with this challenge, company managers conducted a number of brainstorming
sessions that explored various scenarios for the divestiture and developed responses
to the problems that each scenario was likely to pose. To handle the potential
for a decline in company performance resulting from employee distraction or
attrition, company managers decided to provide employees with significant financial
incentives to stay with the business until completion of the sale. Key executives
were offered similar incentives.
Even when company management is sensitive to the concerns of employees, however,
the unfolding of a divestiture can sometimes foil noble efforts to protect the
business and its employees. In the case of the Centocor Diagnostics divestiture,
corporate managers sought to protect nonexecutive employees by providing written
offers for them to transfer to another business unit in the same location when
the sale was completed. As the sale developed, however, it soon became apparent
that the buyer wished to purchase the entire business—retaining both its
current location and the employees—and use the acquisition as a part of
its strategic plan to enter the U.S. market.
In all the planning and strategy sessions conducted by company management, this
possibility had never surfaced, and it created a serious dilemma for company
executives. On one hand, company management was bound to honor the job offers
it had made for employees wishing to stay within the corporate enterprise. On
the other hand, the buyer of the diagnostics business expected to retain those
same employees as part of its purchase.
This dilemma was ultimately resolved by returning to first principles—focus
on employee concerns. The buyer offered financial incentives to all employees,
not just executives, and these incentives helped to head off a potentially explosive
situation, and to bring the transaction to a successful conclusion.
The buyer of a divested business also has a role to play in addressing employee
concerns. In the case of the Centocor purchase, the acquiring company was quick
to allay the anxieties of employees by communicating its interest in their welfare.
In addition, the buyer’s corporate headquarters installed a charismatic
CEO to shepherd the deal and manage the critical first 18 months of the transition.
This executive quickly established a rapport with and obtained the confidence
of employees by being accessible and getting the pulse of the newly acquired
organization.
Conclusion
Just as it is important for the management of a selling company to cultivate
a focus on employee concerns, management of the acquiring company should also
take an interest in employee affairs. Buyers should insist on knowing how the
seller is treating current employees and what performance incentives they may
have been given.
Employees that have been treated poorly or offered no incentives to assist during
the sale can make an ownership transition very painful. For instance, such employees
can delay the training of their replacements by working only from written documents
and operating procedures, refusing to pass along essential information kept
only in their heads. Customers may experience the results of such defiance in
the form of product backorders or poor product quality. And ultimately, such
an uncooperative attitude among employees may even delay the close of the deal.
Managers for an acquiring company would be well advised to get assurances that
the selling company has provided appropriate incentives to its employees. Without
such assurances, the new owners of the business may not find things out until
it’s too late.
Although the process of divesting Centocor’s diagnostic business was not
without its flaws, the outcome was a success by almost all measures. Both companies
met their objectives in improving their business focus. Customers continued
to be served, partner supply chains remained uninterrupted, and the vast majority
of employees landed on their feet. In many cases, in fact, employees were given
opportunities to flourish in new roles with new responsibilities.
Once they had made the strategic decision to sell the business, company executives
played a key role in the ultimate success of the transaction by properly prioritizing
their objectives—and keeping a focus on employee concerns.
Copyright ©2002 MX
