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Divestitures: Investing for Success

Last update on April 14, 2016.

investing smartWe have all grown attached to certain assets in the past. Even when all market indicators are against keeping the asset, we hold onto it, waiting for their values to rise while they keep on disappointing us. Companies that focus on acquisition and acquisition alone also suffer from assets that lose value and start affecting the bottom-line. Companies that acquire and divest create as higher shareholder returns by as much as 1.5 to 4.7 percentage points as compared to companies that focus on acquisitions.

That being said, divestiture alone isn’t going to create value for you, you need to plan your approach before you can expect massive gains. You need to adopt a more thoughtful approach to divestitures in order to garner success for your company.

Evaluate Your Assets Carefully

To ensure a proper and systematic procedure for evaluation, a scoring system based on industry-specific algorithms and criteria should be used. Businesses that do not score well should be considered as candidates for divesture, and if an executive wants to retain a certain low-scoring business, they would have to come up with fact-based arguments based on the set criteria.

Identify the Best Buyers

Once you decide that an asset qualifies for divesture, you need to understand its valuable aspects. You need to learn the strengths and weaknesses of the business inside out, so that you can clearly identify the pool of business owners who might be interested in purchasing it. Any asset that has gone down in value still has its strengths, you just need to identify them and then find a buyer to whom those strengths are of use.

Prepare the Business for Post-Deal Success

Once an asset is sold, its performance still matters, not just for the buyer but also to the seller. As the seller, you might think that the sold business is not your problem anymore, but you’d be wrong. If a business does badly after being sold, it will tarnish your reputation, and it will make it difficult for you to make such deals in the future. That is why senior leaders should prepare the divestiture candidate for post-deal success.

As a leader, you might be inclined to put your best resources on acquisition. However, divestitures deserve your attention. A well managed divestiture not only helps you cut your losses, it shapes your portfolio and saves you from facing complications in the future.

The original content was published by McKinsey&Company.


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