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 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!