LET CONSULTING GROUP
BUSINESS MANAGEMENT CONSULTING SERVICE

CASE: OUR COMPANY WILL BE DIVESTED

I have been working in one of the subsidiaries within a holding company since more than 10 years. The holding company, which located in Australia, will divest all companies within it, which located in several countries to an existing biggest shareholder. The biggest shareholder is a consortium of a big company from Canada. Our holding company is the second biggest company within the industry in Australia. Our company has a bad financial performance, but the other subsidiaries which located in other countries are in a very good financial performance. As one of the management in our company, I am really aware of that it’s really difficult to achieve a certain target in the next whole year and I think the target is unrealistic can be achieved in the next year. Please advise me what will be happened in our office if we fail to achieve the target meanwhile the holding company wants to attract the buyer to buy all shares 100 % very soon. Will the holding company shut down our office if we fail to meet the target?

ANALYSIS

First of all, we should have to look at the motives to acquire a company. Some motives are as follows:

- To minimize competition, so that an acquiring company can lead prices in the market

- To enter a new market which has been built by the target company (the company which will be acquired by an acquiring company), so that the acquiring company can minimize the risk time and expense of starting a new business or a new market

- To take advantages from tax write-off in which the acquiring profitable company buy the loss company for the tax motive. In some countries such as US, there are rules to limit the tax write-off motive of an acquiring company.

- To enlarge distribution in new areas.

Second, after looked at who is the acquiring company and who is the target company in your case, we analyzed that the motives of the acquiring company to your holding company might be:

- To enter the new market which has been built and existed by your holding company

- To enlarge distribution in the new areas of the industry line where your holding company played the big role in the market.

The market has existed; therefore the acquiring company does not have to take on the risk time and expense of starting a new business.

The problem is that your company is the single subsidiary that has the worst financial performance. It might be not attracting the acquiring company to buy 100 % shares of the holding company. An acquiring company usually conducts due diligence before decide to acquire a company. Due Diligence Process will be conducted to evaluate a target company for acquisition. Based on the Due Diligence Report, an acquiring company can  analyze the nature ofa target company and how big the risks involved in involvement with it. 

The possibility to shut down the office where you are working now might be small, because mostly corporations usually use an exit strategy for a business by going to divestiture or spin out in which a division or a company in a holding company or a corporate becomes an independent business. Logically, they don’t want to lose more money caused of  shutting down a division or a business once they invested on it. They prefer divestiture even in the lower bargaining position with the acquiring but still have some earning from divestiture in terms of returning the investment to that of spin out or shutting down totally. In your case, we analyzed that the holding company will keep finding a buyer who will acquire your company, if the acquiring company does not buy 100 % ( in which the acquiring company  will exclude your company in buying the shares). The holding company might take the last chance to spin out your office to minimize absorbing the profit made by the other subsidiaries  to cover the loss of your office while waiting for an acquiring or merger with other companies. Consequently, the management of your office will still be working in a hard time period until meet the good condition and timing in the market to incline your sales performance. 

Nevertheless, the worst possibility is the holding company will shut down its subsidiary as the very bad financial performance and can not be recovered by others. The way taken is  to minimize more operational cost which predicted the financial performance of the subsidiary would not be changed.

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