There is a five-step process to follow to get a proactive divestiture program off the ground,
Build support for it throughout the ranks and ultimately make it a core element of their corporate strategies.
1. Prepare the organization,
2. Identify divestiture candidates,
3. Structure the deal,
4. Communicate the decision,
5. Create new businesses
Prepare the organization: Divestiture, traditionally, is a sad experience for the companies. They do not want to accept the challenge to make the divestiture a routine part of doing business. The stigma about divestiture is so strong that the people resist it, at least initially. Therefore, the senior managers spend a lot of time to explain the rationale for divestiture. For instance Perkin Elmer’s leadership team prepared the ground for the divestiture program by talking directly and repeatedly with people throughout the organization. As a company begins to enjoy the results of proactive divestiture, the stigma should face, and divestiture should become an expected event in a unit’s life cycle. The management will have to assure employees that divestiture is a sign not of failure but of strength.
Identify Candidates: Proactive divestiture requires consideration about selling off good, profitable businesses. It is significant, therefore, to determine concrete criteria for analysis and apply them objectively to every unit. The strategists should consider the following four factors. (a) The business unit’s impact on the rest of the corporation. The strategists should do a number of analyses to identify the effects of a business unit, positive and negative, on other units and on the corporation.
(i) A cultural audit can help determine whether there is a clash between the culture of the business unit and that of the corporation.
(ii) An analysis of the CEO’s calendar can identify units that consume a disproportionate share of management time.
(iii) Interviews with unit managers and a review of denied capital spending requests can identify opportunities that are not being explored because of competitive conflicts.
(iv) Talking with recruiters can give an idea whether a unit is hindering the rest of the company in attracting talent.
(v) A unit analysis determines whether it furnishes the rest of the corporation with new growth options or other valuable benefits such as shared R&D resources.
(b) The corporation’s impact on the business unit: The strategists have also to analyze how much value the corporation adds to the business unit as compared to other potential owners. The analysis should focus on parents’ skills needed by the unit, suitability of prevailing corporate culture, quantifying the synergies between the unit and the corporation and then compared with what another owner could offer the unit.
(c) Ability of the Unit to Beat Market Expectations: The strategists should also analyze how does the market value the business? Does the market currently overvalue or undervalue the business? Management needs this analysis to estimate the unit’s value based on future market expectations for performance and compare that number of the unit’s implied market value embedded in the stock price. This analysis shows executives whether the unit can realistically create value in the future. If the analysis reveals that existing businesses are overvalued, it can make executives more aggressive in selling off units and even in changing the overall identity of the corporation. The identified divestiture candidates, for instance, may include cash cows. The question may arise why sell cash cows? Of course, a cash caw can deliver benefits to a company, providing protection during downturns or being a source of funding for new investment. They are to be sold because they are in mature industries and have limited potential for achieving growth beyond the market’s expectations. It usually contributes little to shareholder value. Indeed, a cash cow can be very risky to hold because its market will often decline sharply if it loses any market share. Moreover, cash cows frequently impose some of the highest hidden costs of ownership on both the corporation and its other business units.
(d) The Corporation’s Overall Portfolio: The strategists should determine the best combination of businesses for the company to hold. The portfolio analysis can be both quantitative and qualitative. It is important to note that no one type of portfolio is best for every company. The purpose of a divestiture strategy should not be simply to transform a diversified, multi-business company into a focused, single-business company. McKinsey Neil Harper and Patric Viguerie have shown that the capital markets reward a moderate degree of diversification.These four analyses will help identify attractive candidates for divestiture. Of course, all candidates will not be sold. In selling businesses certain practical considerations- such as taxes, availability of buyers, market reaction, payment mix, use of divestiture proceeds, and dilution of earnings- should also be taken into account. Such factors can curtail the list of candidates and can place constraints on exit timing.
Structure the deal: After having narrowed the list of candidates, the strategists should think about the potential buyers and how best to structure the deal. The options may range from a simple sale for cash, to a spin-off to shareholders, to more complex structures involving two-step transactions and contingent compensation. Further the manner of conducting the sale should also be decided. Whether it will be an auction with many buyers, or an exclusive negotiation with the most logical buyer, or something in between? Considering the options, the reasons for divesting should be kept in mind. Most frequently, these reasons will lead to favor simple, quick transactions that minimize the costs to the unit being sold and the corporation. When considering costs not only transaction-related expenses but also the costs of time, complexity, and taxes should be taken into account. Because spin-offs can be done tax free, they can be particularly attractive in certain situations. The basic skills required in executing divestitures include coordinating the work of bankers, layers, and accountants, assurance that the employees of the divested unit are not distracted during the sale process and untangle the unit from the rest of the company.
Communicate the decision: The next step in divestiture process is to communicate the decision. However, telling a business unit that it is going to be sold is not easy. In some cases, it would be proper to deliver the message as soon as the unit is selected as a divestiture candidate. But sometimes it can create trouble, if the deal does not get through. Therefore, as a general rule, holding off on the announcement until the sale appears likely would be proper. It is better to reduce uncertainty where possible, so once it becomes clear that a business unit is going to be sold, we are up-front about the decision with our people. However, when it is not yet clear, it can be best to delay communication. Telling someone that the unit might be sold increases uncertainty and can harm the business
Build support for it throughout the ranks and ultimately make it a core element of their corporate strategies.
1. Prepare the organization,
2. Identify divestiture candidates,
3. Structure the deal,
4. Communicate the decision,
5. Create new businesses
Prepare the organization: Divestiture, traditionally, is a sad experience for the companies. They do not want to accept the challenge to make the divestiture a routine part of doing business. The stigma about divestiture is so strong that the people resist it, at least initially. Therefore, the senior managers spend a lot of time to explain the rationale for divestiture. For instance Perkin Elmer’s leadership team prepared the ground for the divestiture program by talking directly and repeatedly with people throughout the organization. As a company begins to enjoy the results of proactive divestiture, the stigma should face, and divestiture should become an expected event in a unit’s life cycle. The management will have to assure employees that divestiture is a sign not of failure but of strength.
Identify Candidates: Proactive divestiture requires consideration about selling off good, profitable businesses. It is significant, therefore, to determine concrete criteria for analysis and apply them objectively to every unit. The strategists should consider the following four factors. (a) The business unit’s impact on the rest of the corporation. The strategists should do a number of analyses to identify the effects of a business unit, positive and negative, on other units and on the corporation.
(i) A cultural audit can help determine whether there is a clash between the culture of the business unit and that of the corporation.
(ii) An analysis of the CEO’s calendar can identify units that consume a disproportionate share of management time.
(iii) Interviews with unit managers and a review of denied capital spending requests can identify opportunities that are not being explored because of competitive conflicts.
(iv) Talking with recruiters can give an idea whether a unit is hindering the rest of the company in attracting talent.
(v) A unit analysis determines whether it furnishes the rest of the corporation with new growth options or other valuable benefits such as shared R&D resources.
(b) The corporation’s impact on the business unit: The strategists have also to analyze how much value the corporation adds to the business unit as compared to other potential owners. The analysis should focus on parents’ skills needed by the unit, suitability of prevailing corporate culture, quantifying the synergies between the unit and the corporation and then compared with what another owner could offer the unit.
(c) Ability of the Unit to Beat Market Expectations: The strategists should also analyze how does the market value the business? Does the market currently overvalue or undervalue the business? Management needs this analysis to estimate the unit’s value based on future market expectations for performance and compare that number of the unit’s implied market value embedded in the stock price. This analysis shows executives whether the unit can realistically create value in the future. If the analysis reveals that existing businesses are overvalued, it can make executives more aggressive in selling off units and even in changing the overall identity of the corporation. The identified divestiture candidates, for instance, may include cash cows. The question may arise why sell cash cows? Of course, a cash caw can deliver benefits to a company, providing protection during downturns or being a source of funding for new investment. They are to be sold because they are in mature industries and have limited potential for achieving growth beyond the market’s expectations. It usually contributes little to shareholder value. Indeed, a cash cow can be very risky to hold because its market will often decline sharply if it loses any market share. Moreover, cash cows frequently impose some of the highest hidden costs of ownership on both the corporation and its other business units.
(d) The Corporation’s Overall Portfolio: The strategists should determine the best combination of businesses for the company to hold. The portfolio analysis can be both quantitative and qualitative. It is important to note that no one type of portfolio is best for every company. The purpose of a divestiture strategy should not be simply to transform a diversified, multi-business company into a focused, single-business company. McKinsey Neil Harper and Patric Viguerie have shown that the capital markets reward a moderate degree of diversification.These four analyses will help identify attractive candidates for divestiture. Of course, all candidates will not be sold. In selling businesses certain practical considerations- such as taxes, availability of buyers, market reaction, payment mix, use of divestiture proceeds, and dilution of earnings- should also be taken into account. Such factors can curtail the list of candidates and can place constraints on exit timing.
Structure the deal: After having narrowed the list of candidates, the strategists should think about the potential buyers and how best to structure the deal. The options may range from a simple sale for cash, to a spin-off to shareholders, to more complex structures involving two-step transactions and contingent compensation. Further the manner of conducting the sale should also be decided. Whether it will be an auction with many buyers, or an exclusive negotiation with the most logical buyer, or something in between? Considering the options, the reasons for divesting should be kept in mind. Most frequently, these reasons will lead to favor simple, quick transactions that minimize the costs to the unit being sold and the corporation. When considering costs not only transaction-related expenses but also the costs of time, complexity, and taxes should be taken into account. Because spin-offs can be done tax free, they can be particularly attractive in certain situations. The basic skills required in executing divestitures include coordinating the work of bankers, layers, and accountants, assurance that the employees of the divested unit are not distracted during the sale process and untangle the unit from the rest of the company.
Communicate the decision: The next step in divestiture process is to communicate the decision. However, telling a business unit that it is going to be sold is not easy. In some cases, it would be proper to deliver the message as soon as the unit is selected as a divestiture candidate. But sometimes it can create trouble, if the deal does not get through. Therefore, as a general rule, holding off on the announcement until the sale appears likely would be proper. It is better to reduce uncertainty where possible, so once it becomes clear that a business unit is going to be sold, we are up-front about the decision with our people. However, when it is not yet clear, it can be best to delay communication. Telling someone that the unit might be sold increases uncertainty and can harm the business
Regardless of the timing of communication, the people of the business unit must be concisely and simply told the reasons for the divestiture. GE’s Jack Welch clearly told his business units that they had to be number one or number two in an industry. If they failed that test, they know precisely why they were being sold.
Create new businesses: The final step in a proactive divestiture program is creation of new businesses. As companies prune businesses, they also need to formulate expansion plans focused on strengthening remaining businesses, starting ones, or making acquisitions. The goals should be to create a cycle of rejuvenation, through which the corporate portfolio of business is continually refreshed. Thus divestiture is not an end in itself it is a means to a larger end that is building a company that can grow and prosper over the long run. Wise executives divest businesses so that they can create new ones and expand existing ones.
Create new businesses: The final step in a proactive divestiture program is creation of new businesses. As companies prune businesses, they also need to formulate expansion plans focused on strengthening remaining businesses, starting ones, or making acquisitions. The goals should be to create a cycle of rejuvenation, through which the corporate portfolio of business is continually refreshed. Thus divestiture is not an end in itself it is a means to a larger end that is building a company that can grow and prosper over the long run. Wise executives divest businesses so that they can create new ones and expand existing ones.
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