How Divestiture Can Create Corporate Value

Knowledge at Wharton | Angie Basiouny | Jan 17, 2023

A new book from Wharton management professor Emilie R. Feldman offers a comprehensive primer on divestitures, which can be a financial game-changer for companies that know how to execute them correctly.

• Feldman, whose research focuses on corporate strategy and governance, spoke to Wharton Business Daily on SiriusXM about her book, “Divestitures: Creating Value Through Strategy, Structure, and Implementation,” which was released in December.
• Opportunity cost: Often the idea of focus is overlooked by executives, and this is really the missed opportunity that could be pursued in the sense that divesting, removing assets and businesses that don’t fit and might be underperforming, could free up resources to pursue better opportunities in a more focused fashion after completion of those transactions.
  • “Managerial compensation is strongly correlated with market capitalization, so there’s a financial incentive not to divest because doing so reduces the executive’s bottom line.”

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• 4 strategies:
  • resolving or exiting underperforming businesses;
  • improving focus;
  • reconfiguring and reshaping the corporate portfolio to move into more profitable opportunities; and
  • addressing regulatory requirements.
• Types of divestitures:  Sales are the most common, but spinoffs and other transactions could be utilized in different circumstances. And finally [there’s] implementation, which has to do with the nuts-and-bolts execution of these strategies and how companies actually put them into practice.
• Value:  if we look at value creation potential, the data show that, on average, divestitures create two to three times the shareholder value of M&As.
• Culture:  Important misconception about divestiture and the stigma that is often associated with these transactions. Divestitures are seen as, “OK, we bought something and it didn’t work out, so now we’re getting rid of it.”
  • There’s a whole world of thinking about divesting more proactively. “What could we be doing that we’re not doing because we’re holding on to this business, not because it’s underperforming or failing but just because we could to better things with our money, our time, our attention, our resources, our people?”

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Emilie Feldman, Wharton Management Professor:

What divestitures can catalyze, especially in companies that are managing them well, is opportunities to rethink how resources are allocated within the company.

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