Divestiture

Although most companies dedicate considerable time and attention to acquiring and creating new businesses, not to mention refining their existing operations, few devote much effort to divestitures.

But like the annual pruning of apple trees, regularly divesting businesses—even some good, healthy ones—ensures that remaining units reach their full potential and that the overall company grows
stronger.

Managers can use divestiture to strengthen and rejuvenate their companies, but only if they look beyond the stigma currently associated with selling off businesses.

In a study of the performance of the 200 largest U.S. corporations, McKinsey & Company found that those companies that actively manage their business portfolios through acquisitions and divestitures create substantially more shareholder value than those that passively hold their businesses.

Moving from reactive to proactive divestiture is not easy, of course. The desire to hold on to businesses, particularly successful ones, is strong. A business may generate substantial cash flows. It may deliver marketplace advantages through its relationships with key customer groups.

Or it may have strong sentimental attachments for employees or other stakeholders, representing an important component of a company’s identity. For executives, selling a business can sometimes seem like
treason.

But whatever the costs of divesting a business, holding on to a unit too long also imposes costs—both on the entire corporation and on the unit itself. Though these costs are often hidden, and accumulate slowly, they can be onerous, far outweighing the benefits of keeping the business.

The final cost of postponing divestitures is the direct impact on shareholder returns. Just as with acquisitions, a well-timed divestiture can contribute to shareholder value, and a poorly timed one can destroy value. Unfortunately, when it comes to managing business units, most corporations fail to follow the age-old maxim “Buy low, sell high.”

Rather they unload a unit only after several years of poor performance—at fire-sale prices. In some cases, industries are so turbulent that managers simply cannot foresee market peaks and troughs. In other cases, they may be able to identify the peaks but be unable to find a buyer willing to pay the going price. In most cases, however, companies just look the other way until it is too late.

Timing the market perfectly is not possible, of course. But a simple rule of thumb can improve a company’s timing considerably: Sell sooner. For the vast majority of divestitures we’ve studied, it’s clear that an earlier sale would have generated much higher returns.

(source: Harvard Business Review)