The Urge to Purge: Improving Value Through Divestitures
CEOs are using divestitures as a tool to unlock value and improve corporate performance. And in our time of M&A mania, the urge to purge is in evidence.
6 March 2015
Once, executing a trade sale, a spin-off or a carve-out might have been considered an admission of management failure. Any divestiture flew in the face of managers’ beliefs that the path to growth and value creation lay though piling new assets on top of old. Getting bigger, not smaller. But that’s all changed now.
Today, more and more CEOs are using divestitures as a critical tool to unlock value and improve corporate performance. And in our current time of M&A mania, the urge to purge is very much in evidence, even in sectors not historically known for them.
On the Up and Up
Divestitures have always been around, of course. GE has shed at least 57 companies since 1990, and they’re not alone. And in the last four years, once companies had recovered their equilibrium following the financial crisis, the number of divestiture deals has shown a marked rise. While each sector has different factors driving the motivation to divest, activity has been particularly buoyant in a number of categories, such as consumer, energy, financial services, industrials, real estate and TMT.
Even the Tech sector, better known for acquiring rather than divesting, had some high profile companies making divestiture headlines last year. In October, HP decided to split itself in two, separating its printer and computer business from its corporate hardware and services business. Around the same time, having spent much of 2014 arguing the case for keeping eBay and Paypal together, management reversed its strategy completely, announcing plans to split the faster growing Paypal from the legacy marketplace. And in what was widely seen as an unraveling of the 2004 deal that bought Veritas into its corporate fold, Symantec announced it is splitting itself into two businesses, a security business and an information management business.
As of September 2014, the number of spinoffs announced or completed was already 30% higher than the number for the whole of 2013. Now that the use of strategy is becoming more widespread, it’s worth looking at some of the key reasons Corporate Boards, CEOs and their senior management teams are increasingly pursuing them.
Focus, Talent, Cash
Top of the divestiture benefit list for most CEOs is improved management focus. Managing multiple product lines and divisions are a constant strain on their executives’ attention, distracting them from growing the company’s core business. In splitting a business or disposing of underperforming business lines, value can be generated quickly as management in each of the new entities push their respective core businesses without being sidetracked. Top and bottom line numbers improve. Freeing up capital and management time allows for better investment of both these scarce resources in existing operations. Cash from assets sales can be used to pay down debt or to build a war chest to fund future acquisitions and recreate shareholder value. All these factors please the capital markets who reward the company accordingly.
In the war for talent, divestitures often help in hiring and retaining the right people for the business. The renewed, sharp focus a divested business receives from its management team can drive tremendous value over the years. Improved incentives directly tied to the growing business help the old and newly-released business’ recruitment and retention efforts.
Getting out in front of potential investor activism allows company boards to plan their divestiture strategy in an objective and well-thought out manner. Having a solid understanding and point of view on the value of your company’s assets and evaluating which will have more value within the corporate fold rather than on their own is critical as the increase in persistent and aggressive investor activism shows no sign of abating.
Next Step, Optimizing Value
Ultimately, disposing of assets is about value creation. Shrinking to grow, if you like. Studies show that breakups have a sounder track records of success when compared with acquisitions or mergers. As the business environment shifts, companies will make disposals in order to adapt. But the authors of Boston Consulting Group’s “2014 M&A Report: Don’t Miss the Exit” report point out that making the decision to divest is but one decision. The trick is working out how to extract the maximum value from the sale of an asset. Choosing the right exit is key to optimizing the value of a divestiture. And that’s where the complication begins.