It is common for larger companies to divest units that are underperforming or otherwise do not meet strategic goals. This practice is likely to increase.
Whether the M&A market is hot or not, divestitures are a challenging activity requiring strong support from equity stakeholders and management. The divestiture activity should not be treated as an inferior activity to acquisitions.
Divestitures have its own set of challenges. Confidentiality needs to be maintained and this may harm both the seller and the buyer. The selling company may not adequately understand what is going on in the unit being sold. For the seller, there is the danger of liabilities and responsibilities that could go on for years after the deal is closed.
I once heard an investment banker say that a successful divestiture is “under constant attack by a swarm of Killer Ds.” They are “Defeat, demoralization, dissension, disruption, defensiveness and division of loyalty.” This fellow seemed to be right on as I’ve heard or seen similar sentiments expressed elsewhere.
The astute business owner and management team will view a prudent divestiture decision not as a matter of shame, but instead as a critical process in achieving strategic and financial goals.
Divestitures are very common among larger companies. Here are some of the general strategic approaches I’ve seen.
Aggressive divestiture programs. The companies that pursue this approach have regular and ongoing strategy reviews by senior management and its advisors. They will analyze past acquisitions and home-grown business units to cut those not generating value or that do not fit into the future strategic plan. Another approach is the “harvesting” of successful businesses by selling them to strategic buyers who want to invest in them to further their own growth.
Operating reviews. If the demands of a business unit become significant (say, capital requirements), management will start asking questions. If the problem cannot be easily solved, then a divestiture may be in order even if the business unit is core to the company’s overall strategy. In this situation, if problems begin to manifest it is a good idea to act quickly before too much value is lost in the problematic business unit.
Strategic reviews. Regular strategic reviews try to determine that all business units are aligned with corporate strategy. Units that are maturing or under-performing need to be identified also. A struggling business may require more cash/capital and management effort than the company is willing to commit. The goal is to avoid buying high and selling low. Identifying units that do not contribute to value is the goal.
Non-core businesses, recently acquired as part of a larger acquisition. Sometimes smaller units that are not part of the strategic goals of the acquirer should be divested in that situation.
So while divestitures may seem distasteful to some, they actually may be strategically necessary for a company to maximize its value.
For the right buyer, a non-strategic fit for one company may be a value enhancer and an excellent acquisition candidate for another.
