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New Research Dispels Divestiture Myths

By Mr. Jim Wininger & Mr. Jorge Rujana

View full article from Transaction Advisors, here.

While most companies have a track record of buying and integrating businesses, executives still hesitate to divest noncore businesses. Divestitures, particularly ones that strategically clean up a company’s portfolio and command an optimal price, can generate shareholder value.

A study of 2,100 public companies found those engaging in focused divestment outperform inactive companies by approximately 15% over a 10-year period, as measured by total shareholder return (TSR).

A further analysis of the 137 largest divestitures conducted by the companies in the study revealed factors contributing to success in divestitures. Several of the findings were counterintuitive.

Companies that divest with the primary stated aim of raising cash to pay back debt don’t do particularly well. Instead, markets reward strategic sellers. Companies divesting to focus on their core saw their market cap rise by 7.9% three months following the announcement.

A fundamental barrier—exposed as myth—is a widely held fear of selling low in a divestiture. This is based on data showing companies acquiring carve-outs outperform acquirers of whole companies. However, it is also true that sellers of carve-outs outperform inactive companies because they reallocate capital to their core and focus both management and scarce resources.

There are four distinct processes that form the basis of value creation through successful divesting.

A company should proactively manage its portfolio and have a keen understanding of how each business contributes to the core and regularly assess them for fit. Only by systematically assessing its portfolio can a company identify the business units that would deliver more value in another owner’s hands.

Once an asset is identified as a candidate for divesting, a company should take 6 to 12 months establishing a blueprint for making it attractive to buyers and implementing initiatives to optimize value.

Many sellers leave money on the table by shortcutting the divestiture process. The top performers devote the required resources to perform reverse due diligence to help decide what buyer could create more value and how it could be created.

Once the deal has been made, the carve-out must take place. The top performing companies establish a separation management office to plan and execute the carve-out while controlling one-off costs and managing any transitional service agreements.

During carve-outs, companies need a well-thought-out internal and external communications plan optimizing the remaining company’s operating model and infrastructure for the future portfolio.


Resources 

Whitepaper: Confidential IPOs - The Upside of Filing in Private

Whitepaper: Digital Disruption - Technology's Impact on Deals

 
 

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