News Article

 

by Richard L. Kaye

 

Acquisitions, whether the target is acretive to an existing business or represents a strategic venture into a new industry or market segment, almost always involve expendable assets regarded as surplus, duplicative, underperforming, or not synergistic with the strategic direction of the go-forward business. Closing these transactions can challenge even the most astute negotiators. Many a deal has fallen through simply because buyer and seller can’t to come to terms on how to handle the unwanted assets.

 

In such circumstances, the concept of ‘asset disaggregation’ can be used by corporate development executives, private equity groups and investment bankers to systematically remove troublesome assets that otherwise might be a major obstacle to getting deals done.

 

Briefly, the asset disaggregation strategy involves a structured sale of undesired assets to a third party, typically at the time the transaction closes or immediately thereafter. The third party then takes control of the assets and monetises them through various disposition methodologies. The spread between what the third party paid for the assets and what they are able to recover, net of expenses, represents the return on investment. The effect of this strategy is to short-cut the disposition process, take the problem out of the hands of the acquiring company’s management, and realise acceptable value for assets and operations that could be of use to other businesses.

 

The third party assumes a relatively high level of risk in an asset disaggregation deal. But this is the reason that both buyers and sellers find the format attractive. They have come to understand the inherent hard and soft costs associated with the asset disposition process and recognize the benefits of conveying the work and risk to others.

 

This article explains in general terms how the asset disaggregation strategy can be applied in an acquisition and how a properly structured transaction can benefit all parties. This strategy, moreover, can be applied in a merger, where duplicative assets are identified. The strategy can also be especially helpful when the deal is at risk of violating certain antitrust regulations and a govenrment agency demands that certain operations be divested as a condition for clearing a merger deal.

 

 

Within the context of a corporate merger or acquisition, the term asset disaggregation denotes the pulling apart or separation of a compendium of business assets into two major categories: ‘what is wanted’ and ‘what is not wanted’. The nature of the transaction usually drives the disaggregation process.

 

When the buyer intends to maintain a continuing business through acquisition, albeit with certain strategic or operational changes, unwanted assets typically are characterised as underperforming or non-synergistic with the intended business platform. Take a multi-line industrial products manufacturer, for example. The buyer sees an opportunity to make strategic changes by eliminating several product lines. Asset disaggregation can be employed to sell off these products and their associated assets.

 

If the deal is a merger involving two competing firms, unwanted assets are typically characterized as duplicative or surplus. An obvious example is the merger of two companies that manufacture the same commodity product. Duplicative assets could include manufacturing facilities, selected machinery and equipment, inventory, distribution centres, real estate, and intellectual property such as trade names. Surplus assets might include raw materials, work-in-process or finished goods inventory, leased or owned office space, or rolling stock such as trucks and rail cars.

 

In a merger of retailers, redundant or overlapping store locations and associated leasehold obligations, as well as in-store inventory, are common issues that need to be addressed.

 

 

Undesired assets can hinder a merger, acquisition or divestiture in two ways. For openers, there are the problems in valuing the assets and subsequently building that value into a deal’s financial structure. Second, even if acceptable values can be established and a transaction can be completed, considerable time and expense can be incurred after closing to dispose of the assets, and perhaps divert the management from the core goal of making the combination work.

 

In an acquisition or an exit, the buyer would be inclined to significantly discount, if not place a zero or even negative value, on non-synergistic assets. As a result, the buyer would drive down the bid price to a point where it might not be an acceptable offer to the seller, who seeks full value for all assets.

 

In yet another scenario, the buyer might insist it doesn’t want to purchase expendable assets, leaving the seller with the unpalatable choice of walking from the deal or accepting a partial sale and being left to shed relatively worthless bits and pieces.

 

If the buyer absorbs another company via merger, target shareholders could experience significant dilution if duplicative assets are valued on the basis of their worth to the seller instead of as dispensable assets in the combined business.

 

In both scenarios, the burden falls on senior executives and support staff – all of whom should be focused on managing the business going forward – to dispose of the unwanted assets, or at least manage a complex process that could involve multiple outside advisers. This time and effort could be better spent on building the combined venture.

 

The effective use of asset disaggregation can facilitate the successful completion of a difficult merger, acquisition or divestiture, both on the domestic front and in cross-border deals.