Costing

How the Best Divest

Companies often sell off businesses when times are hard. Smart CEOs approach divestiture more strategically.

by

and

Rolf-Magnus Weddigen

by

and

Rolf-Magnus Weddigen

From the Magazine (October 2008)

Summary.

Reprint: R0810F

Most corporations are not as skilled at selling off assets as they are at buying them, often divesting at the wrong time or in the wrong way. Either is a very expensive mistake.

A Bain & Company study has found that over the last 20 years, corporations that took a disciplined approach to divestiture created nearly twice as much value for shareholders as the average firm. In this article, Bain partners Mankins, Harding, and Weddigen set out the four straightforward rules those effective divestors follow.

First: Just as they have acquisition teams, smart divestors have full-time divestiture groups, which continually screen their companies’ portfolios for likely businesses to sell off and think through the timing and implementation steps needed to maximize value in each particular case.

Second: They choose their divestiture candidates objectively. Too many firms rush to sell in economic downturns, when prices are low. Thoughtful divestors will sell only those businesses that do not fit with the corporation’s core and are not worth more to themselves than they are to any other company.

Third: Successful divestors consider how to structure a deal and to whom they will sell as carefully as they consider what units to sell and when. And they are as meticulous about planning the implementation of a deal as savvy acquirers are about postmerger integration.

Fourth: They make a compelling case for how, and how quickly, the deal will benefit the buyer, and they make sure the selling unit’s employees will be motivated to stay on and realize that value.

Using these four rules, companies as diverse as Textron, Weyerhaeuser, Ford, Groupe Danone, and Roche have become “divestiture ready”: consistently able to sell at the right time and in the right way to create the most value for their shareholders.

The Idea in Brief

If your company’s like most, it’s geared up to buy assets, not sell them. So when you decide to divest a business, you risk doing it at the wrong time or in the wrong way.

To make the right divestiture decisions, apply these four rules recommended by Mankins, Harding, and Weddigen:

Establish a team focused on divesting.

Divest businesses that don’t fit with your company’s long-term strategy and that would create more value in another firm’s portfolio.

Make robust plans to separate out the divested businesses.

Clearly communicate what’s in the deal for buyers and employees.

Companies that apply these rules strengthen their core and create twice as much value for shareholders. Take Weyerhauser. Through its disciplined divesting, the forest-products company transformed itself from a traditional pulp-and-paper company into a leader in timber, building materials, and real estate. And it’s produced some of the highest returns in its sector.

The Idea in Practice

Establish a Dedicated Team

Assemble a team that regularly screens your company’s businesses for divestiture candidates and considers issues such as timing. Have the team establish relationships with investment banks, which often know potential buyers even outside sellers’ primary markets. Example:

Conglomerate Textron’s divestiture team maintains a database of potential buyers in Textron’s markets. Result? Executives can act decisively when selling opportunities arise. Since 2001, Textron has produced average shareholder returns more than 6% higher than its peers’.

Test for Fit and Value

Regularly identify divestiture candidates—businesses that meet these criteria:

Fit. Keeping them isn’t essential to positioning your company for long-term growth and profitability.

Value. They’d be worth more in any other company’s portfolio than in yours.

By applying these two tests, you’ll fetch better prices for your divested businesses. That’s because you’ll sell on your own terms. And stock values are likely to increase, since investors will expect your company to grow briskly as a result.

Plan for De-integration

Determine whether you’ll divest a business by selling it outright or spinning it off as a separate entity with its own shares.

Choose which assets will be separated from your company and transferred to the divested unit. Decide how you’ll deal with shared overhead costs, brands, and patents. Unravel cross-company systems and processes, considering whether both companies should share some of these for a time. Example:

Bell Canada spun off its regional small-business operations and rural portions of its residential wireline business. It continued providing the new company, Aliant, with some services (such as call centers and network functions) in perpetuity and others only during the transition. Aliant’s stock has bested other Canadian regional carriers’. And Bell Canada has grown as a regionally focused carrier.

Communicate the Deal’s Benefits for Buyers and Employees

Prepare convincing and honest answers to these questions:

What actions would improve the divested company’s profitability or growth?

When will the buyer achieve the deal’s full potential value?

How should the buyer and seller share the value unlocked through the divestiture?

What rewards (generous completion bonuses? severance packages?) will employees in the soon-to-be-divested business get by keeping it humming until the deal closes (and beyond)?

Most corporations are geared up to buy assets, not sell them—the majority acquire three businesses for every one they divest. So when they decide to sell, many do it at the wrong time or in the wrong manner. Those are expensive mistakes.

A version of this article appeared in the October 2008 issue of Harvard Business Review.

Michael Mankins is a leader in Bain’s Organization and Strategy practices and is a partner based in Austin, Texas. He is a coauthor of Time, Talent, Energy: Overcome Organizational Drag and Unleash Your Team’s Productive Power (Harvard Business Review Press, 2017).
David Harding is an advisory partner in Bain & Company’s Boston office and the former leader of the Global Mergers & Acquisitions practice. He is a coauthor of Mastering the Merger: Four Critical Decisions That Make or Break the Deal (Harvard Business School Press, 2004).
RW

Rolf-Magnus Weddigen is a partner in Bain’s Munich office and heads the firm’s private equity and corporate M&A practice in Germany and Switzerland.

How the Best Divest

The Idea in Brief

Establish a Dedicated Team

Test for Fit and Value

Plan for De-integration

Communicate the Deal’s Benefits for Buyers and Employees

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