The ability to divest strategically is as important as the ability to acquire strategically. Consider the case of the health-services giant, which had quintupled its revenues in just 10 years largely through acquisitions. The company was masterful at the buy side of M&A. Its corporate development group looked at upwards of 150 targets a year, and used a remarkably efficient screening process that rejected any potential acquisition that didn't make good sense strategically. If a target got through the initial screen, the group was able to perform the necessary due diligence in three or four weeks. The company did not overlook small deals if they contributed to the development of critical capabilities. Indeed, the median acquisition at this company was for less than $15 million.
When it was divesting a business or asset, however, the company's approach was much less systematic. Divestitures were initiated by business-unit leaders, not the corporate development group; sometimes corporate development didn't even get involved. The process was simply less rigorous.
In our experience, this casual approach — treating divestitures as an afterthought — is typical. And it's a shame. Acquisitions always get a lot of senior management attention and, for those who want it, there is no shortage of outside advice, including a lot in the management literature. By contrast, you'd be hard-pressed to find much on the science of divestitures — few people have thought through its theoretical aspects. "Dump it, dump it all," Gordon Gekko says as the tape moves against him, and a lot of corporate divestitures have this feel to it — reactive.
There are times, of course, when companies systematically look at their portfolios and decide what to keep and what to cut. But this is usually when they have a major restructuring, which is to say when they're in trouble of some kind. And because they tend to do this in haste and under duress, these divestitures are often driven too much by financial exigencies and emergencies, leading to a fire sale that can end up weakening the company over the long term.
Divestiture is a discipline that should be ongoing, helping you keep the corporate house free of clutter, so to speak, and eliminating the need for a massive emptying-out of the attic. A sophisticated approach to divestiture will give you (1) a better-fitting portfolio when you are done; and (2) a means of getting a higher price for what you are selling, since you'll have identified buyers to whom your asset is worth far more than it is to you.
So how should you go about setting your strategy for divesting successfully?
To start with, divestment strategy should be a mirror image of acquisition strategy, and that they both should be done primarily to strengthen a company's differentiating capabilities. By this, we mean the handful of things a company does to offer products or services its customers love, and that its competitors can't come close to matching. When these things work together, they create what we call a capabilities system: examples include Frito-Lay's direct-to-store delivery, Disney's genius for developing and commercializing family-friendly characters, and 3M's incremental innovation machine.
A pinpoint understanding of their differentiating capabilities is equally important for companies trying to decide what to divest. A company should divest any business that doesn't contribute to or take advantage of what it does uniquely well, regardless of whether — and perhaps especially if — the business is thriving. A company that looks at its portfolio in this way will shed assets that pull it in unnatural directions, and will preserve its capital and energy for the activities closest to its core.
A capabilities lens is also useful in identifying divestitures that don't make sense. For instance, it makes no sense to divest a business that accounts for a core part of the company's capabilities system, even if it's performing poorly. At the very least, the seller should separate out, and hold onto, the pieces of the business that are integral to its capabilities. Nor should a company divest an underperforming product or service that, by any reasonable assessment, should be thriving in its capabilities system. In that case, the problem is execution and the appropriate action is to find and correct what isn't working.
Here's our take on a few high profile divestitures or would-be divestitures.
- IBM-Lenovo. Happened in 2005 and was unquestionably the right move. IBM's capabilities began moving away from manufacturing, commodity sourcing and selling in the mid-1990s, when it shifted into software and services and started building its capabilities in the areas of data center management and enterprise systems integration. One question that seems reasonable in light of the low ($1.75 billion) price tag: Did IBM wait too long to sell this PC-making unit?
- GE-NBC/Universal. Another divestiture (partial: GE retains a 49% stake) that's hard to argue with. GE's expertise at building and marketing engineered products is legendary, but media and entertainment call for different skills. Jeff Immelt was happy to free up some of the capital GE had in NBC/Universal two years ago; how long before he decides to free up the rest?
- Pfizer Inc. Pfizer Consumer Healthcare. Pfizer divested its consumer health care business in 2006, selling it to J&J for more than 20x EBITDA. A spectacular move — or was it? Since then, end-user consumers have become more important everywhere in the health care industry. Did Pfizer let go of capabilities it should have kept? (Some of those capabilities, incidentally, came back to Pfizer in 2009, as part of its acquisition of Wyeth, which had a consumer health business of its own.)
- Gillette-Duracell. Gillette's rationale for this acquisition sounded good: Gillette would benefit from Duracell's expertise in front-of-the-store merchandising and marketing; and Duracell would gain by leveraging Gillette's matchless ability to get customers to "trade-up" to higher-price products via innovation But the meld of capabilities never really worked the way Gillette hoped. Now that Procter & Gamble owns Gillette, should it divest the Duracell unit?
We'd love to hear readers' own thoughts on divestitures that either worked brilliantly or bombed — and whether they conform to our theory, or call it into question.