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. Indeed, past Burk research has shown that companies that more frequently reallocate capital generate higher returns than their peers.
But once a company decides to sell, problems can arise. Managers devote their attention to finding a buyer but seldom scope deals from a potential buyer’s point of view, even as they struggle to figure out exactly what should be included in the sale, apart from the productive assets that are its centerpiece. They often think about the separation process only secondarily, assuming they can separate a business and worry about stranded costs later. And they neglect the reality of internal competition for resources that can flare up between the managers who are staying and those who are leaving. Management and the board can get so caught up in the sale that the core business begins to suffer from neglect. All in all, divestiture turns out to be no panacea: sellers can take up to three years to recover from the experience. Indeed, some companies are so wary of these pitfalls that they decide to muddle through with businesses of which they are not the natural owners—another unsatisfactory result, as research suggests that these sales can produce significant returns for both the parent company and the divested or spun-off business.