Valuation: Measuring and Managing the Value of Companies, Fifth Edition

22

Creating Value through Divestitures

As we described in Chapter 19, any program to create value should include periodically and systematically cleaning out your portfolio of businesses. But as we noted in that chapter, managers often mistakenly equate divestitures with failure. Therefore, the role that divestitures actually play in value creation programs is often very different from the role they should play.

Divestitures, like mergers and acquisitions (M&A), tend to occur in waves. In the decade following the conglomerate excesses of the 1960s and 1970s, many companies refocused their portfolios. These divestitures were generally sales to other companies or private buyout firms. Exhibit 22.1 shows that the divestiture wave of the late 1990s included more public ownership transactions, such as spin-offs, carve-outs, and tracking stocks. The mix of divestiture activities over the past 10 years indicates that public ownership transactions have become an established means for divesting businesses. Recent activity levels in divestitures and M&A also appear to show a more even balance in their volumes.

Evidence shows that divestitures create value for corporations in the short term around their announcement, as well as in the long term following the divestiture. Furthermore, companies employing a balanced portfolio approach to acquisition and divestiture have outperformed companies that rarely divest. This approach includes divesting businesses that are performing well but could ...