Divestiture:

Strategy’s Missing Link

By- Lee Drannikoff, Tim Koller &
Antoon Schneider

Summarised by:
Dolly
Sagar
Roshny
Supriya
Sushine
 Meaning of Divestiture:

Divestiture or Divestment is the reduction of some kind

of asset for either financial or ethical objectives or sale of an
existing business by a firm. A divestment is the opposite of
an investment.

Although most companies dedicate considerable time and

attention to acquiring and creating businesses, few devote
much effort to divestitures. But regularly divesting businesses--
even good, healthy ones-ensures that remaining units reach
their potential and that the overall company grows stronger.
 Learning Objective of the article

To understand how companies can balance divestitures with

acquisitions to support their competitive strategy and enhance
shareholder returns
McKinsey consultants Lee Dranikoff, Tim Koller, and Antoon
Schneider show that an active divestiture strategy is essential to a
corporation's long-term health and profitability.
And they say that companies that actively manage their businesses
through acquisitions and divestitures create substantially more
shareholder value than those that passively hold on to their
businesses.
Therefore, companies should avoid making divestitures only in
response to pressure and instead make them part of a well-thought-
out strategy.
 The idea of divestiture in a brief-
Because divestitures-even of steady performers can strengthen
a firm’s balance sheet and unleash resources needed for
investment in higher-growth opportunities.
Divestiture should be a major link in any company’s strategy.
E.g.- General Dynamics, linked divestiture and acquisition so
successfully that it boosted shareholder returns 400% between
1995 and 2001.
Yet for many executives, divestiture is a dirty word signifying
weakness.
When they desperately sell too late and at too low a price, they
reinforce the stigma and endanger their company’s long-term
health.
So, there should be -Balance divestitures and acquisitions-
strategically linking destruction with creation.
 The idea of divestiture in practice-
The High Costs of Holding- When parent companies retain
businesses particularly successful ones too long, costs can
multiply:
Costs to the corporation- Though well established, low-growth
units generate reliable profits, they often develop rigid, risk-
averse cultures that repel entrepreneurial talent and investors
and prevent companies from exploring stronger growth
prospects.
Mature businesses can also consume precious investment
funds and management time, dragging the entire company
down.
Costs to the unit- No parent company has the expertise to help
a business excel through every stage of its life cycle.
For example, a parent may understand how to seed a new
business but not grow it. If the parent is no longer adding
distinctive value but refuses to sell a unit, both entities suffer.
Depressed exit price- Most companies unload units after years
of poor performance at fire-sale prices.
But even sound businesses eventually stop satisfying
shareholders as much as their younger peers, because capital
markets stop rewarding steady track records with soaring share
prices.
The simple solution- Sell sooner.
 According to the article Proactive Divestiture is a five step
process:
1. Prepare the organization-Explain the employees the rationale
for the divestiture & why it’s essential to the corporation’s
health.
2. Identify the best candidates for divestiture-Analyze the
practical issues (taxes, availability of buyers & so on) to
narrow the list of candidates.
“ Wise executives divest businesses so that they can create new
ones and expand existing ones.”
3. Structure the best deal-Identify buyers & determine how best
to structure the sale and ensure that the employees are not
distracted during the sale process. Keep unit employees
focused during the process, perhaps offering additional
incentives to meet targets.

4. Communicate the decision-Don’t announce the sale until

completion of the deal seems likely. Communicate the reason
for the sale concisely and simply.
For example, at PerkinElmer, units that can’t attain market
leadership or double-digit revenue growth become divestiture
candidates.
5. Create new businesses-Reinvest the funds, management time
& support function capacities in attractive new growth
opportunities.
E.g., strengthen remaining businesses, or start or acquire new
ones.
As the fifth step suggests, divestiture is not an end in itself.
Divestiture is not usually the first choice of strategy for a
business. However, as product demand changes and firms alter
their strategies, there will almost always be some portion of the
business that is not performing to management's expectations.
Such an operation is a prime target for divestment and may
well leave the company in a stronger competitive position if it
is divested.
“Divestiture is not a symbol of failure; it’s a badge of smart,
market-oriented management”