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 / Autumn 2013 / Issue 72(originally published by Booz & Company)


The Secret to a Successful Divestiture

When you are selling part of your company, don’t just offer buyers a potential asset; give them the capabilities to gain value from it.

Note: This article was originally published by Booz & Company.

A major North American oil and gas company had formulated the straightforward part of a deal—deciding to sell one of its refineries and a group of its gas stations—a few months earlier. Now, as part of its business strategy in preparing these assets for sale, the company was diving into the details of divestiture, and the capabilities that would be affected by the deal. This exercise was going to be almost as complex as a typical merger or acquisition; certainly it would be more complex than the company’s leaders had expected.

The decision to divest these assets was part of a new M&A strategy—one that would have the oil and gas company concentrate on its higher-margin energy businesses, including refineries that produced diesel and other heavy forms of fuel. The deal was also a first step in getting out of the service-station business altogether—part of a broader industry trend in which major energy businesses had moved away from the idea of being “fully integrated,” with positions in drilling, refineries, and gas stations. This oil and gas company (which is real, but will remain unnamed) was in the early stages of fine-tuning its strategic focus.

Business strategy is always intertwined with capabilities. A capability is the combination of processes, tools, knowledge, skills, and organizational design needed to deliver a specified outcome. Thus, although most M&A departments spend much more time thinking about the sale price, attention to capabilities can make a major difference in a deal’s outcome.

For example, when you sell major assets, you can often maximize the deal price by identifying buyers with capabilities systems of their own that are a good fit. Such buyers can make the best use of the capabilities (including skills and technology) associated with the assets being divested. They are often willing to pay big premiums to complete the deal—and with good reason. Deals that leverage a buyer’s existing capabilities typically fare well (see “The Capabilities Premium in M&A,” by Gerald Adolph, Cesare Mainardi, and J. Neely, s+b, Spring 2012).

But maximizing price is only one of four major goals in a divestiture. The others are minimizing any disruptions to your retained businesses, keeping capabilities away from particularly strong competitors (which might mean turning down a deal that is favorable in other respects), and handing the buyer something that can be operated successfully from Day One. Your motive is not altruistic; in M&A, it is generally in a seller’s interest to minimize the length of entanglement, and to establish a reputation as a good partner for making deals.

Our example is an energy company, but it could just as easily have been in healthcare, media, or financial services. The leaders of any company divesting assets must deal smartly with capabilities issues or risk having the deal fall short.

Differentiating Divestiture

As a seller, you should begin your divestiture process by identifying the desired end state for the important capabilities involved: those you will still need after the deal is done, those you won’t need, and most importantly, those that both you and the buyer will need (see Exhibit 1). In each group, some capabilities are “table stakes”—every company in the industry needs them—whereas others are truly differentiating. The latter can distinguish your company in the market and give you an advantage over competitors. These capabilities require the most attention during a divestment, and you should seek to keep them intact while enabling the buyer to benefit from the deal in every other way (see Exhibit 2).

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