WHAT IS YOUR RELATIONSHIP STATUS? M&A LESSONS FROM YAHOO!, ACCESS BANK AND A MILLION OTHER COMPANIES [PART V]

 PART V: DIVORCED

Divestment in Nigeria

2020 Global Corporate Divestment Study by EY reports that “more companies than ever say they are holding onto assets too long. As they face even tougher, and likely more limited, capital allocation decisions in a disrupted business environment, they will need to reshape their portfolios. At the same time, shareholder activists are preparing recommendations for corporate carve-outs as a result of the crisis.

“The result is that most companies are planning to divest within the next two years. With the proceeds, sellers will look to invest in core businesses and fund new technology investments as they re-imagine business models for the future.”

The EY Study finds that 78% of companies expect to divest within the next two years; 57% within the next 12 months. Based on the EY corporate survey highlights, 72% say they h0ld onto assets too long when they should have divested them, up from 63% in 2019. 65% say they will reshape their portfolio to prepare for a post-crisis world. 54% say they will continue divestment preparation or accelerate plans to divest as a result of the crisis. 52% say the need to fund technology investments will make them more likely to divest in the next 12 months.

Mistakes in doing a deal are not the only causes of corporate divorce, write Faelten et al. Even the best corporate relationship does not always last forever. Sometimes a corporate relationship that was right in the past is no longer so, as the parent or the subsidiary or both change their strategy, the market conditions alter significantly, or technological disruption drives fundamental changes in the industry.

·         Divestment of underperforming assets/refocusing portfolios on core growth areas

In the 2020 Global Divestiture Survey by Deloitte of 100 global organisations with revenues greater than $500 million to understand their perspectives on sell-side activity and divestitures, it is reported that corporations may review their portfolios to determine if they are the right owners for a particular business. If the existing portfolio is not delivering optimal shareholder value or does not have a clear strategic fit, companies may still choose to divest, wind down, or spin off underperforming or noncore assets.

“Over the last 10 years and the run the economy’s been on, a lot of companies have been on somewhat of a buying binge. Now, during the crisis, it’s really time for them to refocus their business and think about where they’re going to invest and where they’re going to get the capital to invest,” says Mike Dziczkowski, US Risk & Financial Advisory partner, Deloitte & Touche LLP, in the Deloitte Survey. “Divestitures really allow them to think through their strategy in potentially selling off some noncore assets. Then they can take that capital and they can use it to fund either day-to-day operations or future investments in core businesses.”

 

AXA Mansard Insurance PLC divestment in AXA Mansard Pensions Limited

On August 7, 2020, AXA Mansard Insurance PLC disclosed its divestment of its subsidiary, AXA Mansard Pensions Limited to Eustacia Limited (a member of the Verod Group), through a notification sent to the Nigerian Stock Exchange.

Commenting on the divestment, Mr. Kunle Ahmed, Chief Executive Officer, AXA Mansard Insurance PLC said the “transaction marks a new step in AXA’s broader strategy to focus on and grow Life, Property & Casualty (P&C) and Health business across all its geographies. The AXA Group sees great potential in the Nigerian insurance market and believes AXA Mansard is ideally placed to capture these opportunities, thanks to its market leadership positions in Health Insurance, Property & Casualty and Life Insurance. We plan to capitalize on our successes to further build our capabilities and continue to deliver the best offers & services to our customers.”

·         A need to generate cash

A tale of Elon Musk as narrated by Business Insider

Musk grew up in South Africa and taught himself how to code. At just 12 years old, Elon Musk sold the source code for his first video game for $500. Then, at age 24, Elon and his brother, Kimbal, founded Zip2 with $28,000 of their father’s money. Zip2 provided a searchable business directory, almost like an online version of the Yellow Pages with maps. Four years later, the brothers sold Zip2 for $307 million. Musk used his $22 million share to cofound the online-banking service, X.com. Via merger, X.com ended up becoming PayPal, with Musk as a majority shareholder. When eBay purchased PayPal in 2002 for $1.5 billion, Musk made $180 million from the sale.

Musk and other PayPal executives, like Peter Thiel and Reid Hoffman, have become known as the “PayPal Mafia.” They took their gains from the PayPal sale and put them into various start-ups and funds. Their investments and creations include YouTube, LinkedIn, Uber, and countless others that have become major players in Silicon Valley today.

As narrated above, divestiture can be a means to generate cash, which you can use to pursue other investment ventures.

·         Pressure from the Government

Access Bank divestment from SIPML

In February 2017, Access Bank divested its 17.65% equity shareholding in Stanbic IBTC Pension Managers Limited (SIPML) following the Central Bank of Nigeria (CBN’s) directive to divest SIPML in compliance with the CBN’s Regulation on Scope of Banking Activities and Ancillary Matters.

The bank sold its stake to the company’s majority shareholder, Stanbic IBTC Holdings PLC.

Also, in January 2014, Access Bank announced the completion of its divestment from its Cote d’Ivoire subsidiary, Access Bank Cote d’Ivoire, in line with the Central Bank of Nigeria’s directive requiring Nigerian banks to either raise fresh capital from the offshore capital market to recapitalise their foreign subsidiaries or divest from them.

 

Tiktok in the US

Following several reports of United States President, Donald Trump, threatening to ban TikTok in the US, on August 6, 2020, the President issued a pair of executive orders imposing new limits on Chinese social-media, TikTok and WeChat.

The orders effectively set a 45-day deadline for an American company to purchase TikTok’s U.S. operations. Also, the orders bar people in the U.S. or subject to U.S. jurisdiction from transactions with the China-based owners of the apps, effective 45 days from the issued date.

Mr. Trump’s top reason for the orders is that TikTok poses an economic and national-security threat to U.S. interests.

Before and after the executive orders, several suitors have approached the Beijing-based ByteDance Ltd., TikTok’s parent company, in a bid to woo TikTok’s U.S. operation. Notable among the suitors are Microsoft Corp., Walmart Inc., Oracle Corp., Facebook and Twitter.

On September 13, 2020, the WSJ reports that “the battle over the future of TikTok took a new turn as Oracle Corp. won the bidding for the U.S. operations of the video-sharing app, people familiar with the matter said, beating out Microsoft Corp. in a high-profile deal to salvage a social-media sensation that has been caught in the middle of a geopolitical standoff.”

 

·         Pressure from shareholder activism

The main goal of activist shareholders is bringing change within or for the company. And this includes pressuring a company’s board of directors to divest some assets of the company. They mount pressure by exercising their voting power or influencing other shareholders.

2020 Global M&A Outlook, published by J.P. Morgan’s M&A team in January 2020, reports that shareholder activists’ focus on M&A activity continues to drive a plurality of activist campaigns. Calls for companies to divest individual assets have reached peak levels over the past three years with demands for breakups and corporate clarity at an all-time high, increasing 13% in 9M 2019 compared with 9M 2018. Opposition of announced transactions, where activists are typically seeking a higher price rather than abandoning a deal altogether, is also at a record high.


The end of Yahoo!

Just before Yahoo! sold its core internet business (Yahoo!’s search, mail, content and ad-tech businesses) to Verizon, Business Insider reports on July 25, 2016 that “Marissa Mayer was hired from Google as Yahoo!’s CEO in 2012 to turn around the business. But she failed to stem the company’s revenue and profit declines, and a group of investors led by the activist firm, Starboard, pressured management to sell up.”

A year later in June 13, 2017, the New York Times reports that “Verizon Communications, the wireless powerhouse that was a cluster of local phone companies when two Stanford University students began compiling the Yahoo! web directory in 1994, completed its purchase on Tuesday of Yahoo’s internet business for $4.48 billion.

“Yahoo!, which once had a market value of $125 billion, will be combined with AOL, another faded web pioneer it bought in 2015, into a new division of Verizon called Oath.”

·         Spin-Offs

According to Faelten et al., spin-offs can be an effective way of separating assets with fundamentally different characteristics, allowing the stock market to price the growth prospects of each segment more accurately.

eBay spun off PayPal

On June 26, 2015, eBay Inc. announced its board of directors’ approval for the separation of eBay and PayPal into independent publicly traded companies. The separation would occur through a pro rata distribution of all the stock of eBay’s subsidiary PayPal Holdings, Inc. to eBay stockholders.

“eBay and PayPal are two great, special businesses,” comments John Donahoe, the then President and CEO of eBay Inc. “As separate, independent companies, eBay, led by Devin Wenig, and Paypal, led by Dan Schulman, will each have a sharper focus and greater flexibility to pursue future success in their respective global commerce and payments markets. I am confident that eBay and PayPal each have the right leadership team, strategy, structure and operational discipline to create sustainable, long-term value for stockholders and deliver great opportunities and experiences for customers worldwide.”

By July 17, 2015, eBay spun off PayPal, enabling the two companies to trade as separate companies on Nasdaq stock exchange.

 

PepsiCo spun off KFC, Pizza Hut and Taco Bell

PepsiCo Inc., an American multinational food, snack and beverage corporation headquartered in Harrison, New York, spun off its KFC, Pizza Hut and Taco Bell restaurant chains in 1997. The companies now share a corporate banner, Yum! Brands, Inc. (formerly Tricon Global Restaurants Inc.).

According to Washington Post, PepsiCo decided to cut its two-decade-old ties to the restaurant business so it could concentrate on its more profitable soft drink and snack foods businesses. It gave shares in the restaurant company to PepsiCo stockholders.

 

It should be noted however, that the financial and strategic rationale of spin-offs is not always so clear; some deals use spun-off companies as a dumping ground for either liabilities or less attractive assets that cannot be sold.

Preparing for Divorce: Lessons from PE

In the survey by Deloitte, it is reported that ultimately, success in divestiture comes down to a prepared seller planning for flawless execution. Becoming a prepared seller means understanding how a buyer will likely approach a specific transaction. And with a myriad of different organisational cultures, there is no one-size-fits-all approach, but private equity (PE) bidders typically share some traits:

1.       PE companies tend to have strong operational strategies and negotiate with suppliers as much as possible. Skilled sellers understand operational intricacies, have supplier contracts and key terms readily available, and understand where additional value opportunities lie.

2.       PE companies are often serial buyers and join a process ready to push the gas pedal. Sellers should expect access requests to information quickly. If robust analyses and underlying data are not available, a private equity bidder will likely not only view the seller as unprepared and try to capitalise on perceived weaknesses, but could also bombard the seller team with questions and data requests.

3.      Value creation is critical for PE bidders. Inquiries or questions that often leave sellers struggling during due diligence focus on growth and opportunities: How is the target competing in the market? Why are you selling it? What investments are needed? Sellers should come prepared with savings and transformational ideas as part of due diligence.

 

Over the years, many theories have been put forth to explain where or how Yahoo! got it wrong. These several theories have been deduced from Yahoo!’s choice of relationship status at each point of its existence.

Poor Timing/Missed Opportunities

In 1998, Yahoo had a chance to buy Larry Page and Sergey Brin’s revolutionary search engine algorithm (Google) for just $1 million. Instead, David Filo, Yahoo!’s co-founder, convinced them to strike out on their own, and even introduced them to one of Google’s earliest investors, Michael Moritz of Sequoia Capital.

And by 2002, after Yahoo! had helped Google grow and gain popularity by using its search engine technology for its internet search engine, Terry Semel, Yahoo! co-founder, tried to acquire Google from the founders. Yet Yahoo! missed this second chance because Semel was only ready to pay $1 billion, as against $3 billion asking price from Google founders.

Reports have it that Yahoo! and eBay also considered a corporate marriage which did not work out.

Also, in 2006, Yahoo! had the opportunity to purchase Facebook for $1 billion. Yahoo!, however, considered Zuckerberg asking price as over-estimated and preferred to make acquisitions at a lower price with Delicious or Flicker, for example.

By early 2008, when Yahoo was declining quickly and steadily, Yahoo! could have mitigated its losses if it had simply walked away with Microsoft’s offer of $44.6 billion to buy all of Yahoo! Instead Yahoo! was strongheaded.

Clearly, these major missed opportunities would have changed Yahoo!’s story to a happy ending one.

Jack of all trades, master of none

When you think of Google, you think of its search engine. When you hear Facebook, social media comes to your mind. Think of Amazon and eBay, you remember e-commerce. Think of Yahoo!, you are lost. Yahoo! is so many things but nothing. And this goes to the fact that Yahoo! never had a real vision of what its future should be.

Late entry to mobile

This theory I can relate with. During my admission processing into Obafemi Awolowo University (OAU) in 2012, I needed an email to complete a registration. Yahoo! Mail was so popular then and I was desperate to have one. I tried for days to register Yahoo! Mail with my brand-new Nokia Asha 200 then, but to no avail. Frustrated, I had to google search for an alternative email. I came across Gmail and concluded the email registration within 15 minutes using my phone. I felt so relieved.

One of the most prominent reasons for Yahoo!’s failure according to an article in Harvard Business Review, “The Decline of Yahoo in Its Own Words”, written by Walter Frick, is that Yahoo was too late to mobile.

Frick writes that “‘Yahoo!’s mobile business barely existed’ when Marissa Mayer took over as CEO in 2012, wrote Vauhini Vara at The New Yorker. Mayer was tasked with bringing Yahoo into the ‘smartphone era’ a full five years after it had started. By then Apple and Google were already dominant in mobile operating systems, and Facebook was surging ahead in apps. Perhaps by 2012 it was already too late.”

 

Indeed, your company’s choice of relationship status at each point of its existence goes a long way in determining its profitability and survival in the long run. Lessons from the companies’ narratives above and a million more around you can help your company make the right choices.