How the Best Divest

Last Updated Feb 17, 2009 2:22 PM EST

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.

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.

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)?

Further Reading


Divestiture: Strategy's Missing Link

Harvard Business Review

May 2002

by Lee Dranikoff, Tim Koller, and Antoon Schneider

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 reach their potential and that the overall company grows stronger. Drawing on extensive research into corporate performance over the last decade, McKinsey consultants Dranikoff, Koller, and Schneider show that an active divestiture strategy is essential to a corporation's long-term health and profitability. In particular, they say that companies that actively manage their businesses through acquisitions and divestitures create substantially more shareholder value than those that passively hold on to their businesses. Therefore, companies should avoid making divestitures only in response to pressure and instead make them part of a well-thought-out strategy. This article presents a five-step process for doing just that: Prepare the organization, identify the best candidates for divestiture, execute the best deal, communicate the decision, and create new businesses. As the fifth step suggests, divestiture is not an end in itself. Rather, it is a means to a larger end: building a company that can grow and prosper over the long haul.

Kill a Brand, Keep a Customer

Harvard Business Review

December 2003

by Nirmalya Kumar

Most brands don't make much money. Year after year, businesses generate 80% to 90% of their profits from less than 20% of their brands. Most companies tend to ignore loss-making brands, unaware of the hidden costs they incur. That's because executives mistakenly believe it's easy to erase a brand; they have only to stop investing in it, they assume, and it will die a natural death. When companies drop brands clumsily, they antagonize loyal customers: Research shows that seven times out of eight, when firms merge two brands, the market share of the new brand never reaches the combined share of the two original ones. Smart companies use a four-step process to kill brands methodically. First, CEOs make the case for rationalization by getting groups of senior executives to conduct joint audits of the brand portfolio. Next, executives need to decide how many brands will be retained, which they do either by setting broad parameters that all brands must meet or by identifying the brands they need to cater to all the customer segments in their markets. Third, executives must dispose of the brands they've decided to drop, deciding in each case whether it is appropriate to merge, sell, milk, or just eliminate the brand outright. Finally, it's critical that executives invest the resources they've freed to grow the brands they've retained.

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