Creating Value through Divestitures
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 term. 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.
Considerations in divesting are (1) possible losses from synergies and shared assets and systems; (2) financing and fiscal changes; (3) legal, contractual, and regulatory barriers; and (4) the pricing and liquidity of assets. The costs from synergy losses, for example, 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.
Divestitures 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 ...