Tuesday, 30 May 2017

Divestitures: Managers should devote as much time to divestitures as they do to acquisitions.

Managers should devote as much time to divestitures as they do to acquisitions.

However, managers tend to delay divesting, which leads to the loss of potential value creation.

Divestments can create value both

  • around the time of the announcement and 
  • in the long run.

A divestiture creates value because of the "best owner" principle whereby the old owner's culture or expertise is not well suited for the needs of the divested business.

A mature parent company divesting an innovative growth division is the typical example; however, companies ripe for divestiture could be at any stage in their life cycle.

Factors to Consider in Divesting

Considerations in divesting are

  • possible losses from synergies and shared assets and systems;
  • disentanglement costs, such as legal and advisory fees and fiscal changes;
  • stranded costs;
  • legal, contractual, and regulatory barriers; and 
  • the pricing and liquidity of assets.

The costs from synergy losses, may be subtle, and existing contracts may have to be renegotiated.  

Evidence shows that the level of liquidity of the divested assets plays a role in the amount of value created.

Private or Public Transactions


  • can be private transactions, such as trade sales and joint ventures, or 
  • they can be public transactions.

Private transactions generally lead to more value creation for the seller.

Public transactions include

  • IPOs, 
  • carve-outs, 
  • spin-offs (demergers), 
  • split-offs, and 
  • the issuance of a tracking stock.

Public transactions can be beneficial over the long term if the industry is consolidating.

Several types of public transactions often generate negative returns, however, and the divestiture is usually temporary

In the case of carve-outs, for example,

  • the market-adjusted long-term performance for carve-out parents and subsidiaries is usually negative, and 
  • usually minority carve-outs are eventually fully sold or reacquired.

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