Maybe We Should Sell That Division?
What a heretical thought! The director or Board that moots such a possibility will generally meet entrenched opposition from the CEO and senior management. It is a prospect both frightening and demeaning for them, as it may be seen as evidence of management failure, disloyalty or copping out.
The arguments against divesting a division are readily marshalled:
- The subject division has a steady if unspectacular cashflow
- It makes a valued contribution to central overhead
- It will be costly in time and money to transact and disentangle
- The prevailing M&A market is paying unacceptable multiples, driven by buyer timidity, tough diligence and bank maxima for EBIT multiples
- To reduce group size is to increase systemic risk and thus the cost of capital
- The impact on the rest of the group will be unsettling
- There are some synergies with brother divisions
- We cannot find a growth opportunity where we can redeploy the cash, management and support resource
This divestment reluctance is very common:
- It usually occurs under (investor) pressure, reactively and too late for best yield
- It usually requires a new CEO (less than two years) to commit to and lead it
- It is a sentimental and unsettling matter that will discomfort all stakeholders to some extent
- This is still a good business that has served us well for years
Divestment as an element of group strategy should be considered because:
- Divestment is not an end in itself, but a means to building a group that can grow and prosper over the long haul.
- Portfolio adjustment is economic logic, a basic truth known to all skilful parent / holding companies. Ask Mr Buffett. Most businesses follow the classic lifecycle curve.
- Divestment causes a stable / stagnant business to be sold into a new ownership whose expertise and synergies may be better for the needs of the business in its lifecycle stage
- Decline in a business’s strategic health is always apparent internally before it shows on the P&L, so to divest proactively may make more sense than pursuing a turnaround
- Nonetheless, a good and profitable business may also be divested if its growth days are over
- It is a powerful way to free up resources for growth opportunities, particularly if debt funding and management resources are tighter in the “new normal”
Timing is everything.
- The “green shoots” of M&A deals are at last appearing after four years of winter.
- Door knockers are calling again, seeking to acquire synergistic businesses.
- Your company may
- If your Board has done this hard thinking in advance, your company may welcome such an approach from a prospective acquirer.
( Much of this piece was gleaned from McKinsey’s superb archive of intellectual property . Please visit
https://www.mckinseyquarterly.com/Strategy/Divesting_proactively_1535 and its companion articles for a deeper discussion on the topic.)
I hope your financial results and your team are IN THE BLACK this month!