How the Best DivestOptimizing the Value of Your Real Estate Portfolio When Considering a Divestiture or Bifurcation

By Edward Connolly, Douglas Gottschalk, Scott Redabaugh and Susan Wasmund

Whether selling off a division or splitting a company in two, you have a lot to gain by doing it right—and that means managing all the risks and impacts associated with corporate real estate. What do you need to do to achieve success?

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Divestitures and bifurcations have never had the glamour that mergers and acquisitions have had in the eyes of boards, executives, markets, stockhold-ers and press. Most believe that mergers represent power, growth and success. Yet the opposite is associated with divestitures. But for every deal with a buyer, there’s a seller. And the reality is, a lot of sellers don’t give divestitures enough attention. As a result, a large number fail to meet their objectives. According to EY’s 2015 Global Corporate Divest-ment Study, only 19% of sellers are high performers who meet the key criteria for divestment success.1

If your organization is planning a divestiture or bifur-cation, there’s a lot to gain by doing it right. Several studies show that divesting companies outperform the market by 2%-5% in the period surrounding the divestiture announcement. As further evidence that capital markets reward companies that divest appropriately, consider G.E.’s recent massive stra-tegic reallocation of capital and investment under a divestiture campaign code-named Hubble, beginning with the sale of $26.5 billion worth of real estate assets. Shareholders applauded the announcement, pushing shares in G.E. up nearly 11%, levels unseen since the financial crisis.2

1. “2015 Global Corporate Divestment Study,” EY, 2015. 2. Michael J. de la Merced and Andrew Ross Sorkin, “G.E. to Retreat From Finance in Post-Crisis Reorganization,” The New York Times, April 10, 2015.

Key Considerations for SuccessWhen it comes to divesting corporate real estate, ask yourself the right questions to ensure your company’s success:• What do we not know?• What’s the strategy? • What real estate do we get rid of?• How do we ensure we’re retaining our core strategic assets?• What’s the impact on the organizational structure? • How can we minimize the impact on operations and productivity? • How can we make sure the divesture isn’t killing morale?• Who will oversee and manage the process?

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Common PitfallsCompanies often underestimate the impact of divestiture from a real estate perspective. It’s typical to embark on one thinking: “We’re just going to get rid of this function. It will reduce the scope of what we have to manage.” In our experience, many sellers don’t anticipate the changes in the management structure for their portfolio, for example. Or they don’t take into account that they’ll have a lot of co-location. Or they neglect to consider vendor contracts and other legal agreements—how are those affected? All of these impacts need to be quantified and analyzed. In addition, there’s a change management component that focuses on the impact on workers. You might also assume it’s easy to divest an entity and neglect to put a governance structure around it—that’s when errors happen and decisions are made in haste.

What Are the Risks?Whether you’re selling an entire business unit, part of a division or getting out of a certain business, real estate plays a central part in ensuring that the remaining entity has high value, or, in the case of a bifurcation, maximizes the value. That could mean making sure you’re in the right location, providing an access point to talent or resources, and more. To get it right, you need to consider all of the risks, including:

• The risk that you’re getting rid of properties that you shouldn’t be. • Underestimating the impact on employee morale and not managing for

the uncertainty.• Not knowing where you stand legally if you’re reducing the scope for

your vendors, whether that involves getting money back or terminating agreements.

• Not knowing what the footprint of the divested company should look like: Do you want to have a hub-and-spoke model? A network-based model? Or do you want to have everybody at a single location with satellite offices?

Consider the risk of not retaining your core strategic assets, for example: A particular office might be an entry point into a market, and divesting of it could have unintended consequences. If you’re reducing your footprint and the news comes out that you’re selling a business based in Silicon Valley—and that business has been the entry point to attract the talent you need for other areas of the business—is it going to send a message that you’re getting out of the market?

Executives often fail to incorporate labor cost, availability and other market-based cost factors into the divestiture strategy. The focus is often on achieving a split and worrying about the long-term strategy at a later date.

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Roadmap for SuccessThe right divestiture/bifurcation real estate plan takes into account all of these risks and drives post-enter-prise success. High-performing organizations employ the following actions to achieve their objectives:

Governance• Establish a governance structure to manage activities. A cross-

functional Program Management Office (PMO) can both oversee the divestiture/split and serve as a conduit for communications and risk management.

• Include representatives from HR, Corporate Communications, IT, Finance, Legal and the business units in the PMO.

• Depending on the breadth of the portfolio, structure the PMO teams regionally and make sure they are aligned with the larger enterprise PMO structure.

Strategy Development• Know the properties in your current portfolio and understand how the

portfolio is currently being used, e.g., which business units operate in which markets/facilities; overall utilization metrics; lease expirations, etc.

• Determine the budget for the split; this often has a direct bearing on what can be done with the real estate as opposed to what should be. Ensure that stakeholders understand the limitations imposed by the budget.

• Set realistic timing. Often what’s needed is a two-phased approach to accommodate an announced deadline, which allows the entities to operate independently in phase one.

• Minimize the number of moves whenever possible to reduce costs and negative impact on productivity and employee morale.

Execution & Implementation• Determine the appropriate cut-off between planning and execution and

clearly communicate it. • Define roles and responsibilities for the key real estate decision-makers

and functional support teams early on and communicate regularly.• Solicit team members’ input early and often to ensure seamless

execution.• Communicate the process of the facility separation plans with varying

level of details depending on the stakeholder groups.• Develop guiding principles around office separations (e.g., minimize

cost, accelerate timelines for short-term gains, design separation plans with the longer-term in mind, etc.).

Human Resources & Operations• Implement a change management program that coordinates

communications and outlines objectives to reduce adverse impacts on employee morale, productivity and attrition. The divestiture process is typically fraught with uncertainty, a factor that can have a profound effect on employee morale. Many executives underestimate the magnitude of this uncertainty and the anxiety it can produce.

• Reassess market alignment with talent requirements to meet current talent needs and any changes in requirements due to new business focus or changes in business processes.

• Create HR systems that tie employees to a facility or market post-divestiture or split.

• Understand the intent of the business and how the planned corporate strategy allows for the development of a real estate strategy that more closely aligns with the longer term plans of the business.

• Incorporate labor cost, availability and other market-based cost factors into the corporate strategy up front. The focus is often on achieving a split and worrying about the long-term strategy at a later date.

Contracts• Consider the impact of shedding scope from your contracts. • Discuss with vendors the impacts—transparency is usually best.• Anticipate significant financial impact on larger outsourcing partners

who may be modeled based on scale, anticipated cash flows and economies of scale.

While there are companies that do many of these deals every year and are set up to manage them effectively, for most organizations a divestiture or bifurcation is such an infrequent event that manage-ment lacks the experience or resources to manage it efficiently and effectively. Bringing in experts who oversee multiple divestitures/bifurcations per year is often a better alternative than going it alone. Experienced experts can recommend the right approach and provide the resources to support the implementation, while also bringing an understanding of what other companies are doing and what’s consid-ered best practices.

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Motorola’s separation into Motorola Solutions and Motorola Mobility on January 4, 2011, was nearly three years in the making and represented “uncharted territory for a Fortune 100 company,” according to co-CEO Greg Brown. JLL was tasked with bifurcation of the 10-million-square-foot Americas portfolio while minimizing business risk, a goal that involved:• Conducting a strategic portfolio assessment and

developing the project plan • Providing a scalable, geographically diverse team

delivering consistent service• Supplying project status and financial data to meet

PMO reporting parameters• Coordinating with key operational teams, including IT,

Security and EHS• Completing all projects and capturing all costs within

the calendar year 2010

JLL evaluated space data at all 76 of Motorola’s Ameri-cas sites, providing key headcount data, BU breakdown and site details to lead a multi-disciplinary team including transactions, facilities management and project manage-ment on determining how to separate the facilities in the Americas. Occupancy planning specialists analyzed head-count and capacity metrics to make recommendations on whether sites should be standalone or shared. JLL provided experienced project managers and re-branding experts from across the US, Canada, Mexico and South America to augment the dedicated account team. In addition to establishing a milestone reporting cadence that included monitoring of funding approvals, JLL instituted and led weekly coordination meetings with IT, Security and EHS; contracted with critical vendors prior to funding via a preferred GC program; and developed a cash flow reporting and accrual process leveraging OneView Projects.

As a result, the combined team developed and carried out site actions for 76 impacted sites in the Americas, 18 of which were cohab/shared sites. All site actions were completed by December 30, 2010, allowing for a tax-free split. Motorola’s CRE team gained increased credibility due to successful collaboration with the PMO and operational partners, with recognition directly from the C-suite. A full 100 percent of Motorola’s commitments were paid and/or ac-crued in 2010, equating to $0 in carryover costs post-split.

What can other large organizations learn from Motorola?1. Determine the project budget and scope of

responsibilities for each specific separation case.2. Assuming multiple sites are affected, develop milestone

tracking for a snapshot to monitor progress. 3. Collaborate with the local facilities management teams

at cohab sites as early as possible to provide insight on building operations, exiting, systems separation, and go-forward operations.

4. To manage complex reporting requirements—from construction progress, financial reporting, types, dates, number of moves, etc.—establish a master tracker and post it to allow for easy sharing and updating.

5. Begin discussions with operational partners early and often—including security, IT, EHS and business leaders.

6. Develop a photo repository by site. Reporting on construction progress with photos is more effective than words alone.

7. In the case of cohab sites, where it’s initially too costly or time-consuming to move one of the entities to a new location, keep in mind that such sites run the risk of becoming problematic for multiple reasons, from shared networks to lease terms. If possible, aim to physically and legally separate every site.

Case Study: When Motorola initiated a split into two independent, publicly traded companies, its CRE organization turned to JLL for help managing the impact across a global portfolio.

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About the AuthorsEdward Connolly is a Senior Vice President with JLL’s Consulting practice. He specializes in M&A strategy, portfolio strategy, process optimization, location strategy, and financial modeling. Ed’s responsibilities include port-folio strategy, mergers and acquisitions advisory, financial analysis, location strategy, organizational design, program management oversight, and the development and implementation of PortfolioCommandSM.

Ed brings more than 17 years of experience in real estate advisory, capital program management, and financial services. He has served clients across a wide spectrum of industries, including financial services, utilities, technology, life sciences, health services, and manufacturing. Prior to joining JLL, Ed worked for HuaMei Capital Company’s M&A Investment Banking practice, where he advised Chinese companies on acquisition, capital fundraising and strategic partnership development opportunities with Western companies and investors. Previously, he worked for Ernst & Young LLP’s Real Estate Advisory Services practice, where he advised corporate clients on capital project-related financial and operational risk management.

Douglas Gottschalk is a Managing Director in JLL’s Consulting practice. Doug’s 15 years of consulting experience have been focused on M&A integration, facility management optimization, organizational de-sign, process improvement, CRE technology review and transformation planning. He assists clients in developing actions that link to enterprise value, in creating effective shared services and CRE organizations and in creating and measuring change.

Prior to joining JLL, Doug served as a consultant in Deloitte’s Corpo-rate Real Estate consulting group. Doug’s efforts included construction consulting, construction audits, market review, lease analysis, incentives negotiation, vendor coordination and space planning.

Scott Redabaugh is a Managing Director with JLL’s Consulting practice. He is responsible for assisting organizations with portfolio strategy, loca-tion strategy and occupancy optimization initiatives that enable business performance. Based in Washington, DC, Scott has more than 20 years

of experience assisting organizations with the configuration of their real estate and operating platform to achieve structural cost, workforce and operating objectives. His areas of expertise include business footprint optimization, office platform strategy (SG&A, Customer Service, HQ, R&D, Sales), business process redeployment strategy, location and labor market strategy, real estate occupancy strategy, and business case development.

Prior to joining JLL, Scott was a Consulting Partner with Cushman & Wakefield’s Business Consulting group, responsible for co-leadership of the practice and client service delivery, and a Vice President at Helmuth, Obata, and Kassabaum Consulting, where he was responsible for managing the Washington, DC, consulting practice in delivery of strategic occupancy planning, workplace improvement and programming services.

Susan Wasmund is a Managing Director in JLL Consulting, leading the Occupancy Planning practice. She is responsible for running and grow-ing the practice, including client relationship management and the health of 50+ accounts. Susan joined JLL in 1997 and has more than 20 years of real estate experience, with expertise in Occupancy Planning, Project Management and Facilities Management.

Prior to leading the Occupancy Planning practice, she grew the Occupancy Planning Projects team from concept to a thriving business that provides occupancy planning services on a variable basis to new or existing clients. She also served as the Occupancy Planning manager for Motorola, Ally, KeyBank and Principal Financial, where she was responsible for the migration and implementation of new computer-aided facility management (CAFM) systems for each client. In addition to space data management, she also ran planning teams to deliver occupancy planning services for all large consolidation, expansion and reconfiguration projects.

With a divestiture or bifurcation comes a dramatic change to your workplace that seriously impacts your workforce. Employee mo-rale and productivity can suffer. Separations, retention and recruit-ing can put excess demands on your HR team and create anxiety across the company. Change management and communications programs to support a smooth divestiture add to the duties of an already stretched team, and yet there can be serious ramifications for the company if they’re not addressed properly.

More often than not, most companies do not consider the impact of real estate decisions on their workplace and workforce.

How you manage, maintain, dispose of real estate or even relocate your employees to other facilities or offices has implications that must be addressed during the initial planning process. A divestiture can also impact the organization and its people in unexpected ways.

Organizations often aren’t aware that experienced resources are available to help with such areas as change management, communications, employee engagement and labor costs. Whether you’re short-staffed to begin with or simply need extra support, it can be critical to seek assistance with all the planning, decisions and execution involved.

Put People FirstMinimize the Impact on Your Workforce with Sound Real Estate Decisions

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ContactEdward Connolly Senior Vice President, Consulting edward.connolly@am.jll.com +1 312 228 2418

Douglas Gottschalk Managing Director, Consulting douglas.gottschalk@am.jll.com +1 312 228 2093

About JLLJLL (NYSE: JLL) is a professional services and investment manage-ment firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.7 billion and gross revenue of $5.4 bil-lion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $55.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further informa-tion, visit www.jll.com.

The best preparation for M&A activity is having conducted one before. JLL’s M&A experts have conducted over 25 major M&A assignments including more than 400 million square feet of property in the Americas, Europe and Asia Pacific. These activities have accompanied many types of transactions, including divestitures and bifurcations. Our team does more than ensure a seamless transition—we deliver bottom-line savings of 10%-15%.

Copyright © 2015 JLL. All rights reserved.

Scott Redabaugh Managing Director, Consulting scott.redabaugh@am.jll.com +1 703 608 3240

Susan Wasmund Managing Director, Consulting susan.wasmund@am.jll.com +1 312 228 3377

We would be delighted to discuss how JLL can assist you in achieving your objectives. Our M&A experts are available to outline how your peers have approached the same challenges you currently face and how you can achieve your objectives.