Divestiture : Strategys Missing Link By Lee Dranikoff, Tim Koller, and Antoon Schneider

Executives spend a lot of time creating and acquiring businesses but rarely devote attention to divesting them. As a result, they often end up selling businesses too late and at too low a price, sacrificing shareholder value Companies that actively manage their business portfolios through acquisitions and divestitures create substantially more shareholder value than those that passively hold their businesses

$100 invested in the average active manager in January 1990 would been worth $459 by the end of the decade $100 would have grown to only $353 if invested in the average passive manager.

Majority of divestitures are done under some sort of pressure. Most of these were not just done under strained cisrcumstances. They happened only after long delays: When problems became so obvious that action became unavoidable When business had below-average operating profits for seven years prior to being sold

Divestitures reflects a pervasive belief in business, while acqusitions are marks of strong, growth-focused executives, divestitures signal weakness and even failure. Executives shouldnt feel ashamed to get rid of businesses, active divestiture is central to value creation Senior managers spend most of their time improving operations Capital markets are actively creating and removing businesses

The marketplace is far more efficient than the typical company in disposing of businesses, the return generated by market over the long haul far outstrip those of the average publicly held company. Divestiture is not a symbol of failure, its a badge of smart, market-oriented management The High Cost of Holding Moving from reactive to proactive divestiture is not easy The desire to hold on to business is strong A business may generate substantial cash flows It may deliver marketplace advantages through relationships with key customer groups It may have strong sentimental attachments for employees or other stakeholders Got angry letters from employees accusing him of destroying the companys heritage

But whatever the costs of divesting a business, holding on a unit too long also imposes costs. Both on the entire corporation and on the unit itself. Cost to the corporation : Mature businesses can also consume precious investment funds and management time, dragging the entire company down Cost to the Unit : If the parent is no longer adding distinctive value but refuses to sell a unit, both entities suffer

Depressed exit Price : The direct impact on shareholder returns. Most companies unload units after years of poor performance.

Divesting Proactively 1. Prepare your organization : a. Explain to employees the rationale for the divertiture and why its essential to the corporations health b. Introduce forcing mechanisms to ensure that managers actively consider divestiture 2. Identify divestiture candidates a. Establish concrete criteria for determining candidates b. Analyze the practical issues to narrow the list of candidate 3. Execute the deal a. Identify buyers and determine how best to structure the sale b. Ensure that employees are not disracted during the sale process, perhaps by offering them additional incentives 4. Communicate the decision a. Hold off on the sale announcement until the completion of the deal seems likely b. Communicate the reason for the sale concisely and simply 5. Create new businesses Reinvest the funds, management time, and support-function capacities in attractive new growth opportunities.