Four Divestiture Lessons from Rupert Murdoch

Mark Herndon of M&A Partners
By Mark Herndon
Jan 26, 2018

Thanks to his ravenous appetite for acquisitions, Rupert Murdoch has built an incredible media empire. Now the mogul is embarking on a major divestiture. If the deal is approved, Disney will purchase the majority of 21st Century Fox's business assets for a cool $52.4 billion--paying a considerable premium over its pre-deal trading price. 

Murdoch isn't known for strategic divestitures, On the contrary, previous divestiture activity has included mostly minor assets or undeniable losers (such as MySpace). But the proposed divestiture represents a new strategic direction, one that M&A professionals can certainly learn from. 

Lesson #1: Use divestiture to strategically refocus. 

Disney is buying about two-thirds of 21st Century Fox's assets. 21st Century Fox will retain its broadcasting network and stations, which include Fox News, Fox Business, FS1, FS2 and the Big Ten Network. These will be spun off into a new entity just prior to closing. The remaining assets essentially represent the core of Murdoch's media empire: news and news media. 

While divestitures have historically been used to raise quick capital, it's far better to treat them as one more "tool" in your M&A kit for increasing value and delivering growth. The most successful serial acquirers are constantly looking for assets to divest, evaluating for both fit and value. By shedding businesses that are not core to your portfolio, you can reinvest in your organization's core competencies. 

Lesson #2: Sell to the right buyer. 

If approved, this deal will be a true win-win for both Disney and 21st Century Fox. By acquiring entertainment brands like X-Men and The Simpsons, Disney will vastly expand its library of films and television series for live streaming and video on-demand. The deal will also improve Disney's international reach through Sky (Europe) and Star (Asia); give the company some strong cable channels like National Geographic; and provide more strategic positioning for film and television production. Every acquired business unit will enhance a capability that Disney already has. 

Contrast that with other prospective buyers, say Comcast or Verizon. While these companies would likely have gotten great value from the acquisition, they are not positioned nearly as well as Disney to extract the most value. Uniquely positioned to maximize the acquired assets, Disney paid a premium for 21st Century Fox, likely higher than other suitors would have offered. The lesson: Shop around for the right buyer, not just any buyer, when you're ready to divest. 

Lesson #3: Communicate your divestiture rationale early and often. 

The senior Murdoch has emphatically called this divestiture "pivoting at a pivotal moment," and his son Lachlan Murdoch predicts that the new entity will be "disruptive," a "lean, aggressive challenger brand" that will be more nimble in the ever-changing media landscape. Meanwhile Disney execs are also hailing the acquisition as a means to re-position the company to compete with Facebook, Amazon, Apple, Netflix and Google (FAANG). This open, consistent communication undoubtedly contributed to both companies' strong stock prices immediately after the deal announcement. 

During any divestiture, it's important that both the buyer and the seller communicate the rationale for the deal early and often, and with all key stakeholders. That includes not only employees and stakeholders, but also vendors and customers. Focus on the strategic value that the deal will create for both organizations. 

Lesson #4: Don't overlook potential stranded assets and costs. 

The 21st Century Fox divestiture will leave Fox Television without a studio--making the wildly profitable enterprise a potential stranded asset. More often, however, M&A teams encounter stranded costs. Previously absorbed by the divested business, stranded costs stay with RemainCo after the separation is complete. Typical sources of stranded costs include excess headcount; shared service or sales centers; or IT infrastructure. 

While it's not usually possible to avoid stranded costs entirely, you can mitigate their impact through ample planning. Just as you would take the time to build a detailed operating model and baseline separation plan for prospective buyers, you should also create a revised budget, headcount plan and operating model for RemainCo that can be implemented in parallel with termination of the Transition Services Agreeement(s) (TSAs), or when those stranded resources are no longer necessary. 

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