Deciding what information to share and what information to keep private is one of the most critical decisions companies face when they split off divisions or product lines. Share too much information, and competitors can identify advantages to use against the parent company. Keep irrelevant information, and risk paying unnecessary costs, such as excess storage, maintenance, and disaster-recovery charges.
A growing number of boardrooms are facing the problematic question of what information to share. By September 2007, global divestitures had reached a record-setting $1.64 billion for the year in almost 10,000 deals, up 25 percent for the same period in 2006, according to Dealogic, a software developer for the investment-banking industry.
Divestiture can be a healthy strategy for pruning under-performing divisions, responding to changes in the marketplace, allowing a company to focus on different markets, or just because cash is needed for new initiatives.
Just like mergers and acquisitions, which a "Gartner Report" described as "... the norm for companies and their service providers," divestitures should be approached as a strategic element of robust business cycles.
Some of corporate America's most well-known names are in the midst of divestitures. Nasdaq reported that Ford Motor Co. sold its Aston Martin nameplate for $925 million in March 2007 and is considering a sell-off of its Jaguar, Land Rover, or Volvo units.
The Wall Street Journal reported that Chrysler may follow Ford and General Motors Corp. in getting rid of assets that are considered "noncore."
Divestitures allow companies to refocus their resources. New York jeweler Tiffany & Co. boosted its fiscal outlook for 2007 based on the impending sale of its Caribbean and Tokyo jewelry stores, according to Dow Jones Newswire.
While divestitures can provide many benefits, CEOs must plan what information to share under stressful conditions. They are expected to sustain growth and retain existing customers while reducing the impact of organizational changes.
Disposing of unwanted divisions or products is complicated. Deciding how to handle information during a divestiture is not unlike splitting the assets of a marriage during a divorce. Not only is the parent company affected, but acquiring companies are as well. Very often the divested company is sold to a competitor. Providing historical information for the part of the company to be divested may increase the selling price, but may provide information that you don't want your competitors to have.
Rick Naschod, a principal with Richmond, VA-based Dominion Partners, an advisory service for middle-market businesses, said buyers are often at the mercy of the parent company as to what information is shared.
Naschod recalled the difficulty of trying to determine the value of divested pharmaceutical product lines for a client interested in acquiring them.
"The pharmaceutical company said, 'This is what we will give you. If your client wants to make an offer, that's great.' But they weren't going to disclose anything more, which made it difficult to understand sales and manufacturing costs," Naschod said.
Some information, such as customer lists, is considered low risk. Competitors likely know already whom major customers patronize. And realistically, by the time a divestiture is announced, it's likely that some key data may already be in the hands of departing employees, or already part of the buyer's information.
Of greater concern are trade secrets, trend analyses, prices, discounts, cost of goods sold, and contract terms with suppliers. If exposed, this information could give competitors an advantage, and should be kept private, if possible. Public and private companies have different obligations.
Complex? Definitely. That's why technology is playing an increasingly larger role by helping to automate the process, reducing time and expense.
"The quantity of information is going to continue to expand," said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. "There's a limit to what human beings are able to parse."
Good IT systems can improve accuracy and simplify sorting what information should be kept and what needs to be mirrored. Systems that do not store data, such as fax servers or credit card processing systems, would typically be duplicated so that the parent company and divested unit have identical copies.
Annual reports and summary financial records should be kept with historical data, but detail orders and other transactions should be separated. Regulations often require keeping the copies of the general ledger and human resources data for both the parent and separated company; this information is not split out. Master data, such as customers, suppliers, and products, can either be separated, or both companies can retain copies.
Experts encourage setting up two separate data centers, one for the parent company and one for the divested company. The process of separating data involves several steps. The first step is setting up the physical environment for each of the data centers and determining which systems are to be retained in their current state and which systems need to have the data separated. The second step is to obtain the proper licenses for all the software that needs to be duplicated in each of the two environments. Then, filter criteria are defined to separate the data for the divested company and the parent company. Finally, there is the arduous task of actually separating the data. Often, reports and interfaces have to be rewritten after the data is separated. Hiring consultants to oversee all the separation activities also is highly recommended to allow executives to focus on strategic operations, participate in the due diligence, and focus on ways to get the most value from the units they are going to sell.
Planning ahead is essential. Experts recommend starting at least three to four months prior to the separation and regularly communicating the impact of changes to all business units.
Costs associated with separating systems can soar, often including new facilities (separate facilities for the parent and for the divested company), new hardware, new software licenses, the actual data separation activities, rewriting of reports, implementing new security rules, restructuring of data warehouses, and creating new programs and interfaces to the separated systems.
With so much at stake, wise executives will take steps to ensure that when they decide what information is "yours, mine, or ours," the only numbers they expose are the ones they intended to.
Tips on Managing Data during a Divestiture
- Get help. If you think consultants and special software are expensive, try re-creating historical data that is accidentally purged or dealing with the impact of unintentionally divulging proprietary information to your competition.
- Review contracts and licenses. Decide who will pay any associated fees.
- Allow adequate planning time before announcing the divestiture.
- Keep employees informed during the planning and divesting stages.
- Think beyond the divestiture. How will changes affect the parent company?
Helene Abrams is an internationally recognized technology and business strategy expert. She is founder and president of eprentise®, an Orlando, FL-based company that produces pioneering software to help businesses separate their data during a divestiture or consolidate their data for mergers and acquisitions.
A graduate of Harvard University, Abrams founded Crystallize, now Applimation, after executive careers with Oracle, Deloitte & Touche, and Ernst & Young, where she established a reputation for helping Fortune 1000 customers.