The Idea in Brief
Why would you even consider selling your company’s sacred cash cow?
Because divestitures—even of steady performers—can strengthen your firm’s balance sheet and unleash resources needed for investment in higher-growth opportunities. Divestiture should be a major link in any company’s strategy. General Dynamics, for example, linked divestiture and acquisition so successfully that it boosted shareholder returns 400% between 1995 and 2001.
Yet for many executives, divestiture is a dirty word signifying weakness. So, managers avoid selling a unit until it’s obviously failing. When they desperately sell too late and at too low a price, they reinforce the stigma—and endanger their company’s long-term health.
The solution? Balance divestitures and acquisitions—strategically linking destruction with creation.
The Idea in Practice
The High Costs of Holding
When parent companies retain businesses—particularly successful ones—too long, costs can multiply:
- Costs to the corporation. Though well-established, low-growth units generate reliable profits, they often develop rigid, risk-averse cultures that repel entrepreneurial talent and investors—and prevent companies from exploring stronger growth prospects. Mature businesses can also consume precious investment funds and management time, dragging the entire company down.
- Costs to the unit. No parent company has the expertise to help a business excel through every stage of its life cycle. For example, a parent may understand how to seed a new business but not grow it. If the parent is no longer adding distinctive value but refuses to sell a unit, both entities suffer.
- Depressed exit price. Most companies unload units after years of poor performance—at fire-sale prices. But 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. The simple solution? Sell sooner.
Divesting Proactively
To make divestiture part of a routine strategy for doing business:
1. Prepare your organization. Repeatedly explain to employees how systematic divestiture protects the corporation’s long-term health. Introduce mechanisms to ensure regular divestiture planning. For example, “date stamp” units and annually assess their growth, margin, return on capital hurdles, ability to become industry leaders, etc.
2. Identify divestiture candidates. Establish four concrete criteria:
- a unit’s impact on the corporation (cultural fit, talent attraction, management-time consumption, shared R&D, etc.)
- the corporation’s impact on a unit (“Would another parent better help that unit excel?”)
- a unit’s ability to beat market expectations
- the company’s optimal portfolio (“What’s our best combination of businesses, based on cross-unit synergies and Wall Street’s view of the company?”)
3. Execute the deal. Identify buyers. Select a sale structure (a cash sale? spin-off to shareholders?) that minimizes costs to unit and parent. Keep unit employees focused during the process, perhaps offering additional incentives to meet targets.
4. Communicate the decision. Don’t announce the sale until completion of the deal seems likely. Communicate the reason for the sale concisely and simply. For example, at PerkinElmer, units that can’t attain market leadership or double-digit revenue growth become divestiture candidates.
5. Create new businesses. Reinvest freed-up funds, management time, and support-function capabilities in new growth opportunities; e.g., strengthen remaining businesses, or start or acquire new ones.
Smart apple farmers routinely saw off dead and weakened branches to keep their trees healthy. Every year, they also cut back a number of vigorous limbs—those that are blocking light from the rest of the tree or otherwise hampering its growth. And, as the growing season progresses, they pick and discard some perfectly good apples, ensuring that the remaining fruit gets the energy needed to reach its full size and ripeness. Only through such careful, systematic pruning does an orchard produce its highest possible yield.