15 Revealing Facts on Corporate Divestitures
-
In a study of the performance of the 200-largest U.S. corporations over a ten-year period, McKinsey & Company found that those companies that actively manage their business portfolios through acquisitions and divestitures create substantially more shareholder value than those that passively hold their businesses. Also, the study showed that those companies that balanced their acquisitions and divestitures performed better than those that focused more narrowly on either acquiring or divesting.
-
Many companies do not currently make divesting a strategic priority, even though it should be a part of every company’s balanced growth plan. Most divestitures are done reactively in response to some kind of pressure (i.e. heavy losses, parent’s debt burden, Wall Street analysts have turned negative, etc). Studying 50 of the largest divestitures completed over the last four years, more than three-quarters took this reactive approach.
-
When a coordinated divestiture program happens today in corporate America, it is often the result of a change in a company’s leadership, as was the case with Jack Welch at GE. Research has shown that just over 50% of all significant divestitures take place within two years of the appointment of a new chief executive.
-
Most executives tend to think of divestitures as simply the flip-side of acquisitions, and while they have many similarities, there are also unique differences between the two (i.e. acquisitions are like being adopted while divestitures are like being abandoned).
-
Active divestiture is central to value creation. Just as the marketplace removes businesses that are inefficient (7% annual turnover rate in S&P 500 over the last five years), so should every company review and remove parts of their business.
-
Divestitures free up the talent and resources that can be applied to more important growth opportunities within the company. Most managers are not truly aware of the costs of holding assets too long.
-
Most companies wait too late to divest. Most managers avoid selling a unit until it’s obviously failing. This results in depressed exit prices and crisis conditions.
-
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. Companies should “date stamp” units and annually assess their growth, margin, return on capital hurdles, ability to become industry leaders, etc.
- Most companies do not assign the same caliber of talent to conducting divestitures as they do to executing mergers and acquisitions. Second-tier talent often produces second-tier results. . .
