Can M&A integration be applied to the acquisition of partial interests?
The Art of M&A(r) / Integration
An Excerpt from The Art of M&A Integration: A Guide to Merging Resources, Processes & Responsibilities by Alexandra Reed Lajoux
Can M&A Integration Apply to Acquisitions of Partial Interests?
Aren’t these acquisitions typically for investment purposes? How can integration happen?
Anytime a company relies on a capital source, whether it is debt or equity capital, that source will influence the company. If the provider of the capital is an operating company in a related industry, this influence may include an integration of resources, processes, and/or responsibilities.
What would be an example of a partial-interest acquisition that led to a full-scale acquisition?
These are not the kind of acquisitions that make headlines, but they happen every day. Consider Bayer CropScience acquiring the remaining interest in the Gustafson joint venture in 2004, and NanoDynamic acquiring the remaining 50% interest in MetaMateria Partners that same year. In 2005, Cisa-Ingersoll-Rand purchased the remaining 70% interest in Italy-based CISA SpA. These are just a few of the hundreds of transactions that occur each year. Behind each of these transactions is a story of a strategy pursued with patient persistence.
KEEPING VERSUS SELLING
How common are postmerger divestitures of acquired company units?
It all depends on the timeline you have in mind for divestiture. Few companies divest their units immediately after an acquisition, unless they’re forced to by antitrust regulators. However, many divest their units eventually. It is difficult to trace this process over a long period of time because companies and their units are constantly undergoing restructuring and unit renaming. In any given year, almost half of all acquisitions are the result of sellers selling a company division. It is reasonable to assume that, given that most major companies are growing both internally and externally, about half of the divestitures were caused by acquisitions. Using this logic, it would be reasonable to assume that about one-fourth (or a quarter) of all acquisitions will eventually be divested. In major companies, however, the percentage seems to be lower. There are three types of divestitures – spin-offs, split-ups, and sell-offs. Some of these divestitures may require a continued involvement, a strategy known as a satellite-launch.
A sale is the most common form of divestiture. It is the sale of a company unit to another company. For example, BF Goodrich Corporation’s JcAIR Test Systems division was sold to Aeroflex Incorporated by BF Goodrich Corporation in 2005. What is a spin off?
A spin-off is the process by which a company spins off one or more units, usually a small part of its business that has a common theme. The company then sells the shares of the new company to the investing public. Recent U.S. examples include Sara Lee Corp.’s spin-off of its apparel business (as Sara Lee Branded Apparel Americas / Asia) in 2005 and the spin-offs of Abbott Laboratories’ hospital products division (as Hospira) and General Electric’s insurance businesses (as Genworth) in 2004.Sometimes spin-offs precede mergers. In Switzerland, Sandoz and Ciba spun-off their chemicals business units, one as an initial public offering and the other as a tax free “demerger”, before merging into Novartis. The slimmed down Ciba was renamed Ciba Specialty Chemicals and then grew by acquisition. It bought the Korean company Daihan Swiss in November 2004, completing the purchase.
Spun off units can be sold separately or combined into one spin-off. This process begins with a special dividend to shareholders, followed by an initial public offering (or a combination of both) of the unit’s stock.4 One common type of spinoff is the IPO carve-out, in which the company proceeds directly to the IPO with no distributions to stockholders. A “divestiture IPO” is a spin-off where the parent retains a stake in the IPO carve out. It differs from a spin-off or sell-off because it involves the whole company and not just one or two units. AT&T has been the most famous company to split up. In 1984, AT&T was split up by the Department of Justice Antitrust Division. It was divided into a telecommunications firm (today’s AT&T), and regional Bell operating company (a.k.a. In order to handle local calls, AT&T created “baby bells” in 1984. After acquiring more companies, AT&T split itself up again in 1996. This time, it was voluntary. They cited business complexity as outweighing the benefits of integration.
Divestments have a variety of reasons. A unit or company may be spun off or split up because it is underperforming and the seller wants the losses to stop. It may also be sold as “crown jewelry” if it can fetch a high price. Last, but not least, it could be sold to appease regulators, such as the Antitrust Division of Department of Justice, or the European Union, who may require this in order to approve a merger. Procter & Gamble, for example, had to sell the Crest SpinBrush business to get antitrust approval from the European Union to buy Gillette back in 2005.
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Lajoux, Alexandra Reed. “Can M&A Integration Apply to Acquisitions of Partially Owned Interests?” The Art of M&A Integration : A Guide to Merging Processes, Resources & Responsibilities. United States of America, McGraw Hill 2006. Pp. 21-24. Print. For footnote details call our office at 866-394-3690.
