divestiture (2)

8/16/2019 Divestiture (2)

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Divestiture: Strategy's Missing Link

SMART APPLE FARMERS routinely saw off dead and weakened branches to keeptheir trees healthy. Every year they also cut back a nu!ber of vi"orous li!bs#thosethat are blockin" li"ht fro! the rest of the tree or otherwise ha!perin" its "rowth.

And as the "rowin" season pro"resses they pick and discard so!e perfectly "oodapples ensurin" that the re!ainin" fruit "ets the ener"y needed to reach its fullsi$e and ripeness. %nly throu"h such careful syste!atic pri!in" does an orchardproduce its hi"hest possible yield.

There&s an i!portant lesson here for !ana"ers. Althou"h !ost co!panies dedicateconsiderable ti!e and attention to ac'uirin" and creatin" new businesses not to!ention refinin" their e(istin" operations few devote !uch effort to divestitures.

)ut like the annual prunin" of apple trees re"ularly divestin" businesses#evenso!e "ood healthy ones#ensures that re!ainin" units reach their full potential andthat the overall co!pany "rows stron"er.

So!e e(ecutives do understand the value of a well#planned divestiture pro"ra!.*ivestiture was for instance a cornerstone of +eneral Electric&s strate"y under,ack -elch# every bit as i!portant as !er"ers and ac'uisitions. *urin" the firstfour years of his tenure as E% -elch divested //0 business units accountin" for 1234 of +E&s assets. Sandy -eill now chief e(ecutive of iti"roup !ade //si"nificant divestitures while leadin" the Travelers +roup throu"h the /332s and

he recently announced plans to spin off the Travelers Property asualty businessfro! iti"roup. Richard -a!bold E% of Pactiv a specialty#packa"in" co!panyhas sold si( businesses since /333 usin" the proceeds to stren"then theco!pany&s balance sheet and invest in hi"h#"rowth opportunities. +re" Su!!eE% of PerkinEl!er has used a co!bination of divestitures and ac'uisitions toco!pletely reshape his enterprise transfor!in" it fro! a supplier of low#!ar"inservices to the "overn!ent into an innovative hi"h#tech co!pany.

%ther !ana"ers can also use divestiture to stren"then and re5uvenate theirco!panies but only if they look beyond the sti"!a currently associated with sellin"

off businesses and e!brace divestiture as vital to their strate"ies.

Too Little, Too Late

6n a study of the perfor!ance of the 122 lar"est 7.S. corporations fro! /332 to1222 Mc8insey 9 o!pany found that those co!panies that actively !ana"etheir business portfolios throu"h ac'uisitions and divestitures create substantially!ore shareholder value than those that passively hold their businesses. %ne

http://web20.epnet.com/citation.asp?tb=1&_ua=bo+B_DE++%7Bval%7D*+vid+SC+db+buhjnh+sid+SC+shn+2+mid+DE+bt+H+do+B_DE++%7Bval%7D*+E492&_ug=sid+43B80C78-C57B-46C5-9684-3282891628E0@sessionmgr4+dbs+buh+cp+1+F1B5&_us=fcl+Aut+hs+True+or+Date+ss+SO+sm+ES+sl+-1+ri+KAAACB3B00029612+hd+False+mh+1+frn+11+713C&_uh=btn+Y+A152&_uso=hd+False+tg%5B0+-+st%5B0+-JN++%22Harvard++Business++Review%22++and++DT++20020501+db%5B0+-buh+op%5B0+-+FE85&cf=1&fn=11&rn=14#tochttp://web20.epnet.com/citation.asp?tb=1&_ua=bo+B_DE++%7Bval%7D*+vid+SC+db+buhjnh+sid+SC+shn+2+mid+DE+bt+H+do+B_DE++%7Bval%7D*+E492&_ug=sid+43B80C78-C57B-46C5-9684-3282891628E0@sessionmgr4+dbs+buh+cp+1+F1B5&_us=fcl+Aut+hs+True+or+Date+ss+SO+sm+ES+sl+-1+ri+KAAACB3B00029612+hd+False+mh+1+frn+11+713C&_uh=btn+Y+A152&_uso=hd+False+tg%5B0+-+st%5B0+-JN++%22Harvard++Business++Review%22++and++DT++20020501+db%5B0+-buh+op%5B0+-+FE85&cf=1&fn=11&rn=14#toc


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hundred dollars invested in the avera"e active !ana"er in ,anuary /332 wouldhave been worth :;


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second#class citi$ens.@ This attitude feeds on itself. -hen !ana"ers postpone adivestiture until a unit is obviously failin" they "uarantee that the !ove will beseen as an act of desperation further reinforcin" the ne"ative connotations ofdivestitures and !akin" e(ecutives even !ore reluctant to pursue the!.

)ut e(ecutives shouldn&t feel asha!ed to "et rid of businesses. The !arketplaceshows in no uncertain ter!s that active divestiture is central to value creation. 6ntheir recent book reative *estruction Richard Foster and Sarah 8aplan point outthat while senior !ana"ers spend !ost of their ti!e i!provin" operations capital!arkets are actively creatin" and re!ovin" businesses. %ver the last five yearsthe annual turnover rate a!on" co!panies in the S9P 2 to


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causin" a co!pany to sta"nate. Lon"#held low#"rowth businesses !ay providethe cash that allows a corporation to thrive today but they can hinder it fro!preparin" for a prosperous to!orrow. So!e co!panies understand this fact. Thedefense "iant +eneral *yna!ics for e(a!ple divested several substantial

businesses durin" the early /332s to set the sta"e for an a""ressive ac'uisitionpro"ra!#and a sharp increase in shareholder returns# later in the decade. ?See thee(hibit @ow +eneral *yna!ics Shrank in %rder to +row.@

Stability can also ha!per "rowth in other ways. o!panies do!inated by !aturelow#"rowth businesses often develop infle(ible risk#averse cultures#cultures thatstifle innovation and free thinkin" that !ake it difficult to attract ener"etic andentrepreneurial talent and that confuse or even repel investors. PerkinEl!er&sSu!!e confronted that e(act situation when he took over as E% early in /33C.e 'uickly launched a series of divestitures not 5ust to reposition the co!pany but

also to attract a new tea! of e(ecutives. 6n a recent )R interview he recalled@-e knew recruitin" talent for the senior ranks would be a challen"e "ivenPerkinEl!er&s steady#ass he#"oes reputation.@ ?6t&s i!portant to note that culturalconflicts can work the other way as wellD Lar"e hi"h#"rowth businesses cani!pose cultural costs on their slower#"rowin" sister units#lenient attitudes aboutcost control for e(a!ple.

Lon"#held businesses can also usurp !ore corporate resources than they !erit.They can for e(a!ple take up invest!ent funds that !i"ht have "one to creatin"new businesses with stron"er "rowth prospects. %r !ore subtly they can drainprecious !ana"e!ent ti!e. 6n the absence of radical decentrali$ation ?which so!eco!panies have adopted but which can pose its own challen"es a seniore(ecutive tea! can only !ana"e a li!ited nu!ber of businesses. A sta"nantportfolio can thus leave a co!pany&s !ana"e!ent paraly$ed unable to focus onnew opportunities. Pactiv which every year reviews the role of each business unitas part of the overall co!pany&s strate"ic#plannin" process sees divestiture as apowerful way to free up resources. -hen e(plainin" why the co!pany sold itsalu!inu! business despite its stron" cash flow E% -a!bold says @6t was usin"resources and !ana"e!ent ti!e we could use better elsewhere and its cyclicalnature G!ade PactivH !ore difficult for investors to understand. 6t didn&t offer thesa!e potential as the other businesses.@

Finally the wron" !i( of businesses can confuse custo!ers. That was one of thereasons AT9T decided perhaps belatedly to break itself up in /334. The co!panywas providin" telephone services to the public but was also sellin" e'uip!ent toco!petitors. As the teleco!!unications !arkets beca!e !ore co!petitivecusto!ers of the !anufacturin" operation ?now Lucent "rew concerned aboutconflicts of interest with AT9T&s telephone services business. 6n a /334 speech


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AT9T&s E% Robert Allen e(plained @6f our network e'uip!ent business !ade thebest products on the !arket we wanted the )ell co!panies or )ritish Teleco! tobuy fro! us without concerns that AT9T&s services business was also co!petin"with the!. onversely we wanted our services business to pursue its opportunities

a""ressively unconstrained by fears that they !i"ht bother a co!petitor who wasa potential custo!er for AT9T e'uip!entD

Costs to the Unit. The co!pany as a whole is not the only one da!a"ed when abusiness unit is held too lon". The unit also suffers. A corporate parent is not a!ere caretaker of its businesses= it provides !any of the skills and resources thebusinesses need to fulfill their potential. And different parents have different skillsand resources. So!e like stron" venture capital fir!s understand how to seed abusiness providin" i!portant capabilities in such areas as product develop!entsales and !arketin" and alliance creation. So!e understand how to "row it

offerin" e(pertise in for e(a!ple operational plannin" and capital !ana"e!ent.%thers know how to !ana"e !ature businesses providin" assistance inoperations rationali$ation cost !ana"e!ent and the like. 6t is rare for a parent tohave the e(pertise re'uired to help a business throu"h every sta"e of its life cycle.?See the e(hibit @Matchin" )usiness 7nits and Parents.@

The proble! arises when a corporate parent stops addin" distinctive value to a unitbut refuses to let it "o. At that sta"e#re"ardless of the unit&s financial contribution#the parent is no lon"er the natural owner of the unit and should consider sellin" itor spinnin" it off. That&s what -a!bold did with Pactiv&s polyethylene#packa"in"business. Althou"h the unit was the lar"est player in its !arket the polyethyleneindustry re!ained hi"hly fra"!ented and -a!bold saw that Pactiv did not havethe resources needed to spearhead a further industry consolidation. As a result itwas not best positioned to take the unit to the ne(t level of perfor!ance. So in,anuary 122/ Pactiv sold the unit to Tyco whose strate"y was to e(pand itspolyethylene business. As -a!bold e(plains @Iou have to know what businessyou are "ood at and let so!eone else !ana"e the rest.@

6n his autobio"raphy ,ackD Strai"ht fro! the +ut -elch tells an illu!inatin" storyabout how divestiture can liberate business units and their e!ployees. e recountshow a "eneral !ana"er of an air#conditionin" business that +E had sold told hi!

about the sale&s salutary effectsD @,ack 6 love it here. -hen 6 "et up in the !ornin"and co!e to work !y boss is thinkin" about air#conditionin" all day. e loves air#conditionin". e thinks it&s wonderful. Every ti!e 6 talked to you on the phone itwas about so!e custo!er co!plaint or !y !ar"ins. Iou hated airconditionin".,ack today we&re all winners and we all feel it. 6n Louisville 6 was the orphan.@

Few corporations today actively consider whether they are addin" uni'ue value to


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each of their businesses. As a result they !ay be har!in" the units& prospects andunder!inin" the !orale of their people.

Depressed Exit Price. The final cost of postponin" divestitures is the direct i!pact

on shareholder returns. ,ust as with ac'uisitions a well#ti!ed divestiture cancontribute to shareholder value and a poorly ti!ed one can destroy value.7nfortunately when it co!es to !ana"in" business units !ost corporations fail tofollow the a"e#old !a(i! @)uy low sell hi"hJ. Rather as we&ve seen they unload aunit only after several years of poor perfor!ance# at fire#sale prices. 6n so!ecases industries are so turbulent that !ana"ers si!ply cannot foresee !arketpeaks and trou"hs. 6n other cases they !ay be able to identify the peaks but beunable to find a buyer willin" to pay the "oin" price. 6n !ost cases howeverco!panies 5ust look the other way until it is too late.

Ti!in" the !arket perfectly is not possible of course. )ut a si!ple rule of thu!bcan i!prove a co!pany&s ti!in" considerablyD Sell sooner. For the vast !a5ority ofdivestitures we&ve studied it&s clear that an earlier sale would have "enerated!uch hi"her returns. There&s a "ood if disturbin" reason for this. As Foster and8aplan&s research su""ests the lon"er a business e(ists the worse it perfor!s forshareholders. Total returns fall in a predictable way throu"hout its life cycle asillustrated in the e(hibit @Ti!e 6s the Ene!y of )usinesses.@ The i!plication isclear. Mana"ers should e(pect that over ti!e even the best !ost operationallysound businesses will cease to perfor! as well for shareholders as their youn"erpeers. That&s not to say that the businesses will be unprofitable but rather that thecapital !arkets will no lon"er reward their steady perfor!ance with substantialshare price increases.

There is another !ore i!!ediate reward for not delayin" the sale of a business.Several studies have shown that divestin" co!panies outperfor! the !arket bybetween 1B and


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pro"ra! "oes a"ainst the "rain of current business practice and a"ainst thesensibilities of !any !ana"ers and e!ployees. )ut it&s necessary to keep aco!pany profitable and "rowin" over the lon" ter!. )y followin" a ri"orouscarefully !ana"ed five#step process co!panies are !ore apt to "et a proactive

divestiture pro"ra! off the "round build support for it throu"hout the ranks andulti!ately !ake it a core ele!ent of their corporate strate"ies. ?For an overview ofthe process see the e(hibit @A Te!plate for Proactive *ivestiture.@

Prepare the organization. @Today is a sad day for our co!pany.@ Those are thewords that traditionally acco!pany divestiture announce!ents. And theyunderscore 5ust how challen"in" it is to !ake divestiture a routine part of doin"business. )ecause the sti"!a surroundin" divestiture is so stron" people willnaturally resist it at least initially. 6t&s critical therefore that senior !ana"ers spenda lot of ti!e e(plainin" the rationale for divestiture and why it&s essential to the

corporation&s health. PerkinEl!er&s leadership tea! for instance prepared the"round for its divestiture pro"ra! by talkin" directly and repeatedly with peoplethrou"hout the or"ani$ation. E% Su!!e held re"ular @town hall@ !eetin"s witheach of his businesses e(plainin" the co!pany&s strate"y and divestiture&s role init. 6n ti!e as a co!pany be"ins to en5oy the results of proactive divestiture thesti"!a should fade and divestiture should beco!e an e(pected event in abusiness unit&s life cycle. 7ntil then thou"h !ana"e!ent will have to assuree!ployees that divestiture is a si"n not of failure but of stren"th.

-hen a co!pany is first buildin" divestiture skills it can be useful to introduceso!e for!al forcin" !echanis!s to ensure that divestiture is routinely considered.

A co!pany !i"ht for instance @date sta!p@ all its businesses. The purpose is notto force a divest!ent by a specific date but rather to ensure that divestiture isseriously considered at re"ular intervals. Private e'uity fir!s have done this foryears with stron" results and so!e public co!panies are startin" to do the sa!e.Pactiv for instance. An analysis of the E%&s calendar can identify units thatconsu!e a disproportionate share of !ana"e!ent ti!e. 6nterviews with unit!ana"ers and a review of denied capital spendin" re'uests can identifyopportunities that are not bein" e(plored because of co!petitive conflicts. Talkin"with recruiters can provide a sense of whether a unit is hinderin" the rest of theco!pany in attractin" talent. %n the positive side a unit should be e(a!ined to

deter!ine whether it furnishes the rest of the corporation with new "rowth optionsor other valuable benefits such as shared R9* resources.

The orporation&s 6!pact on the )usiness 7nit. -hat value does the corporationadd to the business unit relative to other potential owners This analysis has fourpartsD deter!inin" if the parent&s skills are what the unit needs to e(cel= decidin"whether the prevailin" corporate culture suits the unit= and 'uantifyin" the


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syner"ies between the business unit and the rest of the corporation. The !atchin"skills cultural fit and syner"ies then have to be co!pared with what another owner could offer the unit.

The 7nit&s Ability to )eat Market E(pectations. *oes the !arket currently overvalueor undervalue the business This analysis can be difficult#!ana"e!ent needs toesti!ate the unit&s value based on future e(pectations for perfor!ance andco!pare that nu!ber to the unit&s i!plied !arket value e!bedded in the stockprice. )ut as difficult as it is this analysis is essential because it will showe(ecutives whether the unit can realistically create value in the future. )ecause theanalysis will so!eti!es reveal that e(istin" businesses are overvalued it will tendto !ake e(ecutives !uch !ore a""ressive in sellin" off units and even in chan"in"the overall identity of the corporation. The divestiture candidates pinpointed by thisanalysis !ay for instance include cash cows which have always been held

sacred. -hy sell cash cows )ecause they are in !ature industries and haveli!ited potential for achievin" "rowth beyond the !arket&s e(pectations. -hile acash cow can deliver benefits to a co!pany providin" protection durin" downturnsfor e(a!ple or bein" a source of fundin" for new invest!ents it usuallycontributes little to shareholder value. 6ndeed a cash cow can be very risky to holdbecause its !arket value will often decline sharply if it loses any !arket share#anevent that at so!e point happens to virtually all hi"h#!arket#share businesses.Moreover cash cows fre'uently i!pose so!e of the hi"hest hidden costs ofownership on both the parent and its other business units.

The orporation&s %verall Portfolio. -hat is the best co!bination of businesses forthe co!pany to hold )y e(a!inin" the portfolio that would re!ain if different setsof divestitures occurred you can see the i!pact on the overall co!pany. Thisanalysis can be both 'uantitative ?assessin" cross#unit syner"ies for e(a!ple and'ualitative ?deter!inin" the value the corporate center provides to the business orthe business&s role in how -all Street views the co!pany. 6t is i!portant to notehere that no one type of portfolio is best for every co!pany. The purpose of adivestiture strate"y should not be si!ply to transfor! a diversified !ulti#businessco!pany into a focused sin"le#business co!pany. 6n fact research by Mc8insey&sKeil arper and Patrick i"uerie has shown that the capital !arkets reward a!oderate de"ree of diversification. )etween /3C2 and 1222 !oderately diversified

co!panies delivered shareholder returns that were at least as stron" as and inso!e cases stron"er than those of !any focused co!panies and consistentlystron"er than those of hi"hly diversified co!panies.

These four analyses will hi"h#li"ht attractive candidates for divestiture. Kot all ofthe candidates will end up bein" sold however. Practical considerations# such asta(es availability of buyers !arket reaction pay!ent !i( use of divestiture


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proceeds and dilution of earnin"s#also need to be taken into account. Such factorscan narrow the list of candidates and can place constraints on e(it ti!in".

So!e readers will ar"ue that the practical issues should be considered first. -e

disa"ree. Many corporations overe!phasi$e the practical issues and thus presu!ethat divestin" is i!possible. )y focusin" on !ore strate"ic considerations at theoutset co!panies will build !o!entu! for divestiture and will look at the practicalconstraints as proble!s to be overco!e rather than as roadblocks to action. +re"Su!!e points out that fear of earnin"s dilution can often stop !ana"e!ent fro!considerin" divestiture. As he notes thou"h @Sellin" a "reat cash business willlower your earnin"s per share. )ut you can still do well by your shareholders byreinvestin" the proceeds in a hi"her "rowth business which should lead to aco!pensatin" increase in your priceearnin"s !ultiple.@

Structure the deal.

%nce you&ve narrowed the list of candidates you need to think about potentialbuyers and how best to structure the deal. Iou will typically have !any optionsfro! a si!ple sale for cash to a spin#off to shareholders to !ore co!ple(structures involvin" two#step transactions and contin"ent co!pensation. iti"roupfor e(a!ple appears to be structurin" its divestiture of Travelers as a two#stepspinout possibly to !ini!i$e its ta( liability. Even with a strai"htforward sale forcash you need to decide how to conduct the saleD *o you have an auction with!any buyers an e(clusive ne"otiation with the !ost lo"ical buyer or so!ethin" inbetween As you consider your options keep in !ind your reasons for divestin".Most fre'uently these reasons will lead you to favor si!ple 'uick transactions that!ini!i$e the costs to the unit bein" sold and the parent. -hen considerin" costsyou&ll need to take into account not only transaction#related e(penses but also thecosts of ti!e co!ple(ity and ta(es. )ecause spin#offs can be done ta( flee theycan be particularly attractive in certain situations.

Many of the basic skills re'uired in e(ecutin" divestitures !irror those involved inac'uisitions such as coordinatin" the work of bankers lawyers and accountants.)ut there are uni'ue considerations as well. Iou need to ensure that thee!ployees of the divested unit are not distracted durin" the sale process. To keep

e!ployees focused on the business PerkinEl!er "ives the! additional !onetaryincentives to !eet their operational tar"ets. Iou also need to untan"le the unit fro!the rest of the co!pany. At a !ini!u! shared services such as hu!an resourcesand financial !ana"e!ent !ust be scaled back. 6n !any cases the links "o !uchdeeper with business units sharin" facilities intellectual property and people.

-hile the challen"es of separatin" businesses can so!eti!es see!


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overwhel!in" it&s i!portant to re!e!ber that the process can actually deliversubstantial benefits helpin" co!panies uncover ways to achieve "reater si!plicityand transparency in their re!ainin" operations.

Counicate the decision. There&s no "ettin" around itD Tellin" a business unitthat it&s "oin" to be sold is tou"h. 6n so!e cases it will !ake sense to deliver the!essa"e as soon as the unit is selected as a divestiture candidate. )ut doin" socan backfire if the deal falls throu"h. Therefore as a "eneral rule we su""estholdin" off on the announce!ent until the sale appears likely. As Pactiv&s -a!bolde(plains @6t is best to reduce uncertainty where possible so once it beco!es clearthat a business unit is "oin" to be sold we are up#front about the decision with ourpeople. owever when it is not yet clear it can be best to delay co!!unication.Tellin" so!eone that the unit !i"ht be sold increases uncertainty and can har! thebusiness.@

Re"ardless of the ti!in" of co!!unication the reasonin" !ust be stated conciselyand si!ply. +E&s -elch fa!ously told his business units that they had to benu!ber one or nu!ber two in an industry that fell into one of three cate"oriesD core!anufacturin" technolo"y and services. 6f they failed that test they knewprecisely why they were bein" sold. Si!ilarly PerkinEl!er&s Su!!e uses twosi!ple criteriaD 6f a business cannot attain !arket leadership or cannot deliverdouble#di"it revenue "rowth it beco!es a candidate for divestiture.

Create ne! "usinesses. The final step in a proactive divestiture pro"ra! isironically creation. As co!panies prune businesses they also need to for!ulatee(pansion plans focused on stren"thenin" re!ainin" businesses startin" newones or !akin" ac'uisitions. The "oal should be to create a cycle of re5uvenationthrou"h which the corporate portfolio of business is continually refreshed.

*ivestiture is not an end in itself. Rather it is a !eans to a lar"er endD buildin" aco!pany that can "row and prosper over the lon" haul. -ise e(ecutives divestbusinesses so that they can create new ones and e(pand e(istin" ones. All thefunds !ana"e!ent ti!e and support function capacity that are freed up throu"h adivestiture should therefore be reinvested in creatin" shareholder value. 6n so!ecases this will !ean returnin" !oney to shareholders. )ut !ore likely than not it

will !ean investin" in attractive "rowth opportunities. 6n co!panies as in the!arketplace creation and destruction "o hand in hand= neither flourishes withoutthe other.

Our Research

6n developin" our perspective on divestitures we drew on three sources of


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infor!ation and analysisD

McKinsey Corporate erfor!ance Study

Mc8insey tracked the perfor!ance of !ore than 1222 co!panies in 10 industriesover al!ost four decades in order to !odel capital !arkets in the 7.S. econo!y.The study closely replicates the real econo!y e(cept that it does not enco!passall industries or co!panies. o!panies were included in the study when they werebi" enou"h to be part of the lar"est CoB of 7.S. co!panies ?re"ardless of whetherthey are still in e(istence today. o!panies that were ac'uired or went bankruptwere deleted fro! the database.

Transaction History of the "## Largest Co!panies fro! $%%# to "###

Three Mc8insey collea"ues ?,ay )randi!arte Robert McKish and -illia! Fallonidentified 122 of the lar"est co!panies in /332 that were still tradin" independentlyin 1222 and e(a!ined all their ac'uisitions and divestitures durin" that period thatwere worth !ore than :/22 !illion. -e used this database to rank and co!pareshareholder returns and transaction fre'uency.

Rationale of I!portant 'eals fro! $%%( to "##$

-e identified all the divestitures !entioned on the front pa"e of the -all Street,ournal durin" Septe!ber of /33C/333 and 1222 and Au"ust of 122/. ?For 122/we used the deals !entioned in Au"ust as the -orld Trade enter attacks !ade

Septe!ber an abnor!al !onth. -e investi"ated the circu!stances surroundin"each of these divestitures in detail by lookin" at press co!!ents and analystresearch before and after the deal as well as by analy$in" the financialperfor!ance of the parent and the divested business unit in the years precedin"the deal. -e considered deals to have been done in reaction to pressure onlywhen we found clear supportin" evidence#we suspect that a far "reater nu!ber ofdeals were actually done under pressure but co!panies often prefer to hide thatfact fro! public view. -e also considered the ti!in" of those divestitures that weredone in reaction to pressure. Further!ore we researched the tenure of the E%sof the divestin" co!panies.

Most 'i)estitures *re Reacti)e

More than three#'uarters of divestitures are reactive done in response to pressureon the parent or the unit. And nearly two#thirds of the reactive divestitures aredelayed takin" place only after the parent or unit has suffered fro! weakperfor!ance for a nu!ber of years.



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SourcesD -all Street ,ournal Septe!ber of /33C/333 and 1222 and Au"ust of 1literature search= analyst reports= financial state!ents.

Ho+ eneral 'yna!ics Shrank in Order to ro+

A""ressive divestitures by +eneral *yna!ics in the early /332s set the sta"e for a

series of ac'uisitions later in the decade dra!atically i!provin" the co!pany&sreturns to shareholders.



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General Dynamic's total returns to shareholders

Matching -usiness nits and arents

As a business proceeds throu"h the three !a5or phases of its industry life cycle

what it needs fro! its parent co!pany chan"es substantially. 6t&s unrealistic toassu!e that a sin"le parent can provide all the different capabilities needed for abusiness to thrive over the lon" ter!.



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Industry phase

Ti!e Is the /ne!y of -usinesses

A business&s shareholder returns decrease as it a"es.



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A business's average total return to shareholders relative to its industry

* Te!plate for roacti)e 'i)estiture

*ivestiture is not a one#shot effort. 6t needs to beco!e a routine part of aco!pany&s strate"y. An iterative five#step approach works best.

PREPARE THE ORGANIZATION

Explain to employees the rationale for the divestiture and

why its essential to the !orporations health"

Introdu!e for!in# me!hanisms to ensure that mana#ers

a!tively !onsider divestiture"

PREPARE THE ORGANIZATION

Esta$lish !on!rete !riteria for determinin# !andidates%

in!ludin# a units impa!t on the rest of the !orporation% the

!orporations impa!t on the unit% the units a$ility to

meet or surpass mar&et expe!tations% and the optimal

portfolio for the !ompany"

Analy'e the pra!ti!al issues (taxes% availa$ility of $uyers%

and so forth) to narrow the list of !andidates"



16/16

*TR+,T+RE THE -EA.

Identify $uyers and determine how $est to stru!ture the sale

(for example% a simple sale for !ash% a spin/off to shareholders%

or !omplex stru!tures involvin# two/step transa!tions and

!ontin#ent !ompensation)"

Ensure that employees are not distra!ted durin# the sale pro!ess%

perhaps $y offerin# them additional in!entives"

,O00+NI,ATE THE -E,I*ION

Hold off on the sale announ!ement until the !ompletion of the

deal seems li&ely"

,ommuni!ate the reason for the sale !on!isely and simply"

,REATE NE1 2+*INE**E*

Reinvest the funds% mana#ement time% and support/fun!tion

!apa!ities in attra!tive new #rowth opportunities"

P%T% ?%L%R

~~~~~~~~

)y Lee *ranikoff= Ti! 8oller and Antoon Schneider

Lee *ranikoff is an associate principal with Mc8insey 9 o!pany where he is aleader of the hi"h#tech practice. Ti! 8oller is a Mc8insey principal and a coauthorof aluationD Measurin" and Mana"in" the alue of o!panies ?-iley 1222.

Antoon Schneider is an en"a"e!ent !ana"er in Mc8insey&s private#e'uitypractice. They are based in Kew Iork.

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