April 18, 2019

Divestitures: Advance Prep is Key to Creating Shareholder Value

Most companies are geared up to buy businesses, not sell them – and that is reflected in most companies’ post-divestiture performance. According to a recent Willis Towers Watson study, 54% of the companies that engaged in divestitures from 2010-2018 lost shareholder value.

What distinguishes the winners from the losers? The study suggests that one clue is provided by the success of spin-offs, which outperform other types of divestitures. And the reason for that just may be the incredible amount of advance preparation that’s required to do a spin-off. Here’s an excerpt:

Inadequate resources for executing divestitures is a frequent challenge, especially when compared with the resources typically committed to an acquisition. This is a costly imbalance. Early engagement is essential to a smooth selling process, allowing the seller to form a view on what is to be sold and to fully understand the implications for the remaining business. This ensures the deal team is able to identify and allocate the right people, tools and processes to the asset to be divested, defining an approach to timely separation that will not distract the base business.

The study says that by taking a more disciplined approach to the process, a seller will have time to improve the value of the business before actively engaging with potential buyers, which will allow them to command a higher price.

John Jenkins