Strategic Commodity and Cash-Flow-At-Risk Modeling

Profitably parting ways: getting more value from divestitures. companies often struggle to capture the full value of a separation. here’s how to do better.

December 2010 | by David Delaney

When a large company faces a headwind in its existing businesses, consolidation and efforts to transform the portfolio are its most plausible ways to grow. Even so, these are not without risk. Consolidation strategies have a better chance for success when a company can show that it has "earned the right to buy." Do its operating margins and returns on invested capital compare favorably with those of its industry peers? Has it created value through mergers and acquisitions in the past? The answers to these questions—as well as the industry's readiness for consolidation—have a direct bearing on whether buying makes sense than selling.

Mergers and Acquisitions investments and sound operations are part of the picture for any company that considers transforming its portfolio. But it is even more important to place the right bets on where to compete. A company must not only figure out which markets are likely to be attractive but also have a realistic view of its own capabilities. Are any of them powerful enough to confer a competitive advantage in a new geography, product, or customer segment—or even a different sector? The importance of having a real competitive advantage holds whether an entry strategy calls for organic growth or acquisitions.

The bar for distinctive capabilities is high. A company may believe that it has them in logistics or the supply chain, for example. But are they so strong that customers of other companies will switch? Will these capabilities support a price premium or allow the company to maintain operating margins that competitors can't match? If the answer to all of these questions is no, the capabilities don't provide a true competitive advantage; they are merely things the company does well.

Negotiating the Deal

Most divestitures start with a strategic decision that a company is no longer the best owner of one of its businesses. It’s a natural move for executives who see value in actively managing their portfolio of business units—recognizing that to grow, they sometimes have to shrink first—to deploy capital into a business with higher returns, for example, or to reshape the company’s strategy.

We work with companies to ensure that their decisions to divest are based on a clear strategic rationale and sound principles of value creation. We ground all of our work in a company's portfolio strategy, determining which businesses do or do not fit. We also advise on the best approach to divestiture—for example, whether to sell directly to an industrial or private-equity buyer or to float shares of the entity through an initial public offering. And we use our experience in literally hundreds of transactions to help clients develop a compelling equity story, negotiate with potential buyers, and manage the entire process of divestiture execution.


Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan