(Charlotte, NC – August 20, 2019)
In a previous edition of Ahead of the Curve, we examined the increased frequency of carve-out acquisitions by private equity. While corporations frequently have dedicated corporate development teams seeking acquisitions, few have the same resources devoted to continually and pragmatically evaluating divestments. Furthermore, executives often hesitate to sell segments or portions of their business for several reasons including: fear of market reaction, belief the segment will improve, and effort and time required of their employees. With private equity and corporate cash levels at all-time highs and increased competition for deals driving up valuations, evaluating divestment opportunities has never been more important.
Corporations should take the same disciplined approach with divestitures as they do with acquisitions. Holding on to a non-core business can prove just as risky and detrimental to shareholder value as a poor acquisition. Management time spent on non-core businesses could be more efficiently allocated to strategic priorities. Furthermore, capital used by these divisions could be more potent if redeployed to higher growth core projects. Bain & Company research confirmed this, showing that $100 invested in inactive companies in 2005 would have grown to $181 in 2015. By comparison, the same $100 invested in a focused divestor that also engaged in frequent and material M&A would have grown to $252 (1).
Harvard Business Review found four practices that companies who have historically succeeded at divesting implement. The first is to dedicate a full-time team to divestitures, just as they do with acquisitions. Often these teams have members with unique skills specific to divestments, such as experience separating accounting systems or specialized HR expertise. The second is to continually evaluate how segments align with the company’s overall long-term strategic vision. A third practice is to plan for separation extensively. Finally, successful divestors provide compelling logic for the buyer, clearly communicating the strategic rationale, timeline, and profitability prospects of the unit being divested to achieve the optimal selling price (2).
One company that has embraced this intentional discipline towards both acquisitions and divestments is Henkel, a German-based chemical and consumer goods company. Over the past decade, Henkel has acquired an equal number of companies as it has divested. This continual effort to evaluate the strategic fit of each business unit and to remove those that no longer fit has contributed to Henkel’s annual Total Shareholder Return of 17.3% over the past 10 years. This compares with an average Total Shareholder Return of 6.2% for a comparative set of companies over the same time period (1).
At a minimum, strategic divestitures should be considered as a part of a corporation’s approach to portfolio optimization. Developing this competency can pay dividends in shareholder returns.