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Divestiture:

Strategys Missing LinkBy- Lee Drannikoff, Tim Koller &

Antoon Schneider

Summarised by:

DollySagarRoshnySupriyaSushine


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Meaning ofDivestiture:

y 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.

y 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 reachtheir potential and that the overall company grows stronger.


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Learning Objective of the article

y To understand how companies can balance divestitures withacquisitions to support their competitive strategy and enhanceshareholder returns

y McKinsey consultants Lee Dranikoff, Tim Koller, and Antoon

Schneider show that an active divestiture strategy is essential toa corporation's long-term health and profitability.

y And they say that companies that actively manage theirbusinesses through acquisitions and divestitures createsubstantially more shareholder value than those that passivelyhold on to their businesses.

y Therefore, companies should avoid making divestitures only inresponse to pressure and instead make them part of a well-thought-out strategy.


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The idea of divestiture in a brief-

y Because divestitures-even of steady performers can strengthena firms balance sheet and unleash resources needed for

investment in higher-growth opportunities.

y Divestiture should be a major link in any companys strategy.

y E.g.- General Dynamics, linked divestiture and acquisition sosuccessfully that it boosted shareholder returns 400% between

1995 and 2001.

y Yet for many executives, divestiture is a dirty word signifying

weakness.


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y When they desperately sell too late and at too low a price, theyreinforce the stigma and endanger their companys long-term

health.

y So, there should be -Balance divestitures and acquisitions-

strategically linking destruction with creation.


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The idea of divestiture in practice-

y The High Costs of Holding-When parent companies retain

businesses particularly successful ones too long, costs can

multiply:

y 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.

y Mature businesses can also consume precious investment funds

and management time, dragging the entire company down.


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y Costs to the unit- No parent company has the expertise to help

a business excel through every stage of its life cycle.y 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.

y

Depressed exit price- Most companies unload units after yearsof poor performance at fire-sale prices.

y 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.

y The simple solution- Sell sooner.


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According to the article Proactive Divestiture is a five step

process:1. Prepare the organization-Explain the employees the rationale

for the divestiture & why its essential to the corporations

health.

2. Identify the best candidates for divestiture-Analyze thepractical 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.


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3. Structure the best deal-Identify buyers & determine how best

to structure the sale and ensure that the employees are notdistracted during the sale process. Keep unit employees

focused during the process, perhaps offering additional

incentives to meet targets.

4. Communicate the decision-Dont 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 cant attain market

leadership or double-digit revenue growth become divestiturecandidates.


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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.


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y 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 itis divested.

y Divestiture is not a symbol of failure; its a badge of smart,

market-oriented management


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