Divestitures present unique challenges that make it difficult
for companies to realize full value potential. Even companies with
established competency in M&A transactions can struggle to
A report from PwC's Deals Divestiture
practice identifies three primary sources of divestiture deal
Transaction proceeds are generated from the sale of the divested
business (less investment banking, legal, and advisor
disbursements). These proceeds are typically the most obvious
source of value that companies look to in effort to maximize deal
An understanding of transition costs can enhance a company's
negotiating position and serve to avoid unexpected transaction
costs. There are three types of transition costs in divestiture
transactions: separation costs, transition services agreement
costs, and stranded costs.
Separation costs are those incurred by extricating a divested
business from its parent company's infrastructure. Examples of
these costs include costs associated with implementing a standalone
enterprise resource planning system for the divested company, and
costs associated with carving out and migrating data specific to a
business being sold.
Costs associated with implementing a transition services
agreement are incurred by providing support to the divested company
on a temporary basis. Examples include the provision of information
technology support, finance and accounting back office support, and
operational support. A previous
post on this blog discussed transition services agreement costs
in more detail.
Stranded costs are costs that were previously absorbed by the
divested business but remain with the parent company following
separation. Examples of circumstances that lead to stranded costs
include shared services centers, shared infrastructure, and
long-term vendor contracts that support multiple business
In order to maximize deal value, a divesting company must
implement a structured and systematic plan that identifies
transition costs early in the process. Effective transition cost
management facilitates informed decision making and negotiations
throughout a divestiture's transaction process.
Value realized from parent/seller optimization is generated from
external and internal impacts of the divestiture. Examples include
value generated from post-deal contractual relationships,
competitive and geographic ramifications, and customer impacts with
respect to retention.
Companies typically focus on transaction proceeds and
parent/seller optimization since these factors account for the
majority of a transaction's value and are usually easy to
identify. Transition costs, on the other hand, pose the greatest
challenge as they are difficult to identify and require the
divesting company to evaluate its processes and policies
objectively. Nevertheless, transition costs can be significant and
cannot be overlooked if a company is to successfully maximize
divestiture deal value.
The author would like to thank Robyn McLaren, articling
student, for her assistance in preparing this legal
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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