Over half of all mergers fail creating value in the long term, and in the short term, the acquiring company’s share price typically falls. But when a company sells a part of its business, it tends to create value and improve stock performance. So why are there typically two acquisitions for every divestiture?
Businesses feel continuous pressure for growth. And, it can be exciting to expand the company’s boundaries. But paring down strategically through divestiture can actually improve both short- and long-term performance, help senior executives maintain focus, and reap rewards from investors.
Paring down strategically through divestiture can actually improve both short- and long-term performance, creating value to help senior executives maintain focus, and reap rewards from investors.
Leads an elective session on divestitures in Wharton’s Mergers and Acquisitions program, explaining that while it might seem a counterintuitive offering, the session is to help participants develop a broader mindset. M&A is one way to change the focus of your company. But you can also change it by moving in the opposite direction. Especially in the face of an acquisition, think about whether an area of your business should be reduced. Instead of being only with growth, consider the overall scope of the company and how it might by narrowing the focus.”
Because of The only researcher whose work is on the subject. The program provides valuable insights and rigorous content on divestitures that managers can’t get anywhere else. Creating value enjoys sharing her work with practitioners who are or will be in the process. I get to hear their real-world concerns and challenges and can help them navigate divestitures with a systematic, two-stage approach.
Her new framework is in two parts: the first centers on the decision-making process and the second on execution. Feldman says you need to look at your organization’s environment — in which circumstances should you think about divestiture as an appropriate response? And if you are considering it, which specific business makes sense to sell, and how do you do it? Once you make the decision, there are a number of mechanisms to choose from. Including sell-offs, spin-offs, carve-outs, and management buyouts.
In the execution phase, she explains the three steps managers need to take once the divestiture is underway. The first is focusing on the internal factors within the company that might need to be restructured. Including compensation, HR, and resource allocation.
Second, The focus should widen to the relationship between the divesting firm and the business they are divesting. Did you get input from it? Are there managers who worked in both and got customers from both? How do you restructure those relationships that got because of the divestiture?
Third, consider external factors: what will outside the company? How will you portray the divestiture to the investment community, for example? You are telescoping from purely internal issues to relationships between companies, to purely external considerations. It’s a logical progression.
The stage with the greatest potential for failure — and therefore the one that should get special attention — is the intermediate one. Making relationship-level decisions and dividing resources is especially challenging for managers. It’s difficult to unwind shared resources. Let’s say your marketing budget funded two parts of your business, one of which you’ve sold. Should you keep the budget at the same level and use it all to fund the remaining business? In that scenario, you might end up spending too much. Or you could cut it in half, and potentially underfund the remaining business. It might not have been a true 50-50 split, or there may be overhead costs that were not considered.
Ultimately, although divestitures are complex, their rewards are typically worth the effort. Understanding the process ahead of time and having a guiding framework allows managers to improve their decision-making and focus on the actions they need to take to derive maximum value.
When conducting the same analysis to assess M&A value creation by region. Where the acquirer and target were within the same region. The results were slightly different, though active buyers’ growth remained strongest. When comparing acquirers among the Americas, Europe, and Asia-Pacific regions, active buyers again created more value than infrequent and non-buyers. However, in most cases, infrequent buyers created less value than non-buyers in Europe, and total shareholder return growth was lower for infrequent buyers than non-buyers in the Americas. It may be possible that active buyers gain greater experience executing several transactions and may be more likely to be successful than infrequent buyers.