Strategic Corporate Finance: Applications in Valuation and Capital Structure

CHAPTER 3

Sell: Creating Value Through Divestiture

Divestitures are an essential, though often ignored, tactic in corporate portfolio management. They play an important role in actively managing the growth profile of a corporate portfolio, enabling the exit from less attractive products and markets and the reallocation of capital to more productive uses. And while acquisitions continue to far outnumber divestitures, best practice has divestitures no longer delayed by common misconceptions of book losses, market timing, and earnings dilution.

Strategic reviews and economic profitability analysis are now increasingly employed to identify divestiture candidates within portfolios where historically only acquisitions were the focus. Best-in-class, multiline businesses continuously evaluate their business portfolios to seek out opportunities to create value and shed businesses that are potentially worth more under a different form of ownership, such as businesses that have plateaued or may require considerable resources to capture their growth prospects.

Restructuring creates value through improved market transparency, resource allocation, and management incentives and accountability. Business units can be constrained on capital, strategic direction, policies, or operating procedures, which can constrain enterprise value. When businesses are freed to act in their own best interests (which may not be the same as the parent), considerable new value can be created. Divestitures tend to ...