Some companies divest business units for a variety of reasons. These can include:
To generate cash, improve bottom-line stability and generate additional funds for future growth or acquisitions. Alternatively, divestitures can align with a company’s strategy by removing non-core assets that are underperforming and not contributing to the company’s success.
To Improve Bottom-Line Stability
Divesting occurs when a company partially or fully liquidates assets to generate funds urgently, often as a part of a restructuring. This strategic move helps companies eliminate failing divisions and focus on profitable ones.
While divestiture can be a good option, it’s essential to plan it well and execute it successfully. The process is time-consuming and can require significant human and financial resources.
A successful divestiture requires an HR consulting service with the right experience, expertise, and motivation. It also requires patience and a fair valuation. Likewise, management must convey the rationale behind the divestiture and its benefits to internal and external stakeholders. It also has to balance reducing ongoing expenses and ensuring that both entities remain competitive in the market.
To Raise Cash
When companies face financial problems or operating challenges, divestitures can be a great way to raise cash quickly. However, this process can be complex and requires careful planning.
Usually, these divestitures are focused on underperforming assets with little chance of being profitable. They may also be assets that must fit with the company’s core strategy. Another common reason divestiture occurs is to generate additional funds for mergers and acquisitions. These funds can be used to pay down debt or purchase a new company to further expand the business.
A vital component is getting a fair valuation on the asset before selling it. This allows the management to choose the best possible buyer for the acquisition and maximize its value.
Regardless of why a company divests, capital markets reward strategic sellers, and they can achieve higher valuation multiples. Markets recognize that the best investors focus on their core, generate cash, and improve operating performance without sacrificing liquidity or capital allocation. Moreover, they are more agile than their peers who don’t make these moves.
To Generate Additional Funds
A company may divest a business unit or asset to generate additional funds. This can occur for many reasons, including needing to meet funding requirements for acquisition, significant capital expenditure, or developing tax advantages.
Divestment also occurs when a business unit has poor performance and does not contribute to a company’s overall strategy. In these cases, divestitures can help to focus the management team and the company’s overall business strategy by removing non-strategically important or non-fitting divisions.
In addition, a divestiture can free up corporate capital and other resources for the company to invest in a more strategic business area. This might mean using the proceeds to fund future growth, acquire or improve a core business, or reinvest in a lower-performing division.
Corporations that follow these disciplined divestiture practices sharpen their strategic focus on the core and create nearly twice as much value for shareholders. That is a big difference and can make all the difference to your bottom line.
To Align With a Company’s Strategy
Companies divest for several reasons, but one of the most common is to align with a company’s strategy. Whether a business has non-conforming capabilities or is not naturally more valuable to the company than anyone else, divestiture can help a firm refocus its portfolio of businesses on those that add value to shareholders.
Having an overarching strategic plan is vital to ensuring that all departments in a company are working toward a common goal and making the most of their time. It can also ensure that all organization members understand how their actions contribute to the overall strategy and how they can help drive success.
Achieving strategic alignment requires leadership, communication, and constant monitoring. These elements are necessary for employees to focus on activities that align with the company’s goals or vision. These could result in wasted hours and opportunities for a company to better serve customers and stakeholders. In large companies, these issues can be particularly significant. Therefore, ensuring everyone knows and understands the strategy before launching any initiatives is essential.
To Avoid Antitrust Concerns
Antitrust laws are designed to make sure businesses compete fairly. They typically target agreements that limit competition, raise prices, and reduce output. However, there are exceptions to this rule, including arrangements that promote competition and increase customer use of the product. Often, divestitures occur to avoid antitrust concerns. This is especially true for iconic assets like brands and real estate.
Companies may choose to sell these businesses for their high value, and in some cases, for vanity reasons (in other words, to boost a company’s reputation). It’s also possible that a company will be forced into a divestiture by regulatory authorities. A well-executed divestiture can be one of the most potent value-generating tools an executive has available. It helps a company focus on its core and free up cash for other opportunities.
Companies must carefully consider how these business units fit into their strategy to maximize divestiture results. They also need to be aware of the potential for stranded costs in a sold business unit and lay a plan to optimize the supply chain and route to market, as well as general and administrative expenses, for a more focused company.