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The Essential CFO: A Corporate Finance Playbook by Bruce Nolop

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Chapter Ten

Executing Divestitures and Spinoffs

CFOs SHOULD REGULARLY CONSIDER potential opportunities for selectively pruning a company's business portfolio. This can sharpen the company's strategic focus and generate capital to be redeployed in the business or else returned to shareholders.

DIVESTITURE EVALUATIONS

CFOs should recognize that periodically reviewing the company's portfolio is a healthy exercise that can generate significant shareholder value. Some of the reasons for divesting a business can include:

  • Strategic Fit: It no longer fits with the company's strategic objectives.
  • Return on Investment: It is not expected to earn the company's cost of capital.
  • Value of Synergies: It will have more value to an acquirer who can realize synergies.
  • Risk Implications: It has risk exposures that the company does not want to retain.
  • Management Focus: It will not receive sufficient focus from the company's management.

Simply put, a divestiture can make a great deal of strategic sense, especially if the business is likely to receive an attractive valuation in the market. After a divestiture candidate has been identified, CFOs then can perform a financial analysis to confirm that the divestiture makes economic sense—comparing the value to be obtained in the market versus the value to be realized from retaining the business.

Valuation Analysis

In analyzing a divestiture, CFOs should use the same valuation methodologies that are applied to acquisitions. They then should consider the ...

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