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


The Secret to a Successful Divestiture

Undoubtedly there is a set of analogous activities at your company, drawing on people and technologies that are dispersed throughout the organization. A scoping exercise in and of itself isn’t a plan for divesting assets—it doesn’t answer the question of how to ensure the integrity of differentiating capabilities. But it does lead to a hypothesis of what will have to be accounted for, and either added to or carved out of an asset, in the months leading up to a divestiture.

Step 2: Baseline Analysis

This step involves understanding the components of key capabilities and how they come together to enable products and services to be successful. The idea is to break down those activities into their constituent parts—what the activities consist of, who performs them, where in the company they are performed, how long they take, what technologies make them possible, and what problems are associated with them.

The baseline analysis identifies exactly what you can let go of and what you need to keep—and illuminates where a new owner might be left with a gap.

Not all buyers have gaps. Some may have capabilities systems that are a better fit for the assets you’re selling than your own capabilities are. In other cases, the ability of your activities to fill the buyer’s gaps becomes a point of negotiation in the deal—factoring into the price, the time to completion, or the transition services that you must provide. If no buyer has yet been identified, this is your chance to formulate a clear picture of the value that your divested assets might hold for someone else.

Completing a baseline analysis of your capabilities is more difficult than it might seem. The problem is that most people in a company—even, and sometimes especially, those with special talents or important functional roles—have a narrow view of what underpins a business’s success. The salespeople will describe the differentiating capabilities in one way, the marketing people in another, and the product development people in a third. From up close, and amid the competing perspectives, it can be hard to tell which activities truly make a difference. You may need to weigh all these inputs dispassionately—and pull back to get a wider perspective.

Step 3: Option Analysis

In this step, having identified one or more potential buyers, you look closely at the buyer’s capabilities needs and how your assets can help fill those gaps. This enables you to maximize the value of the deal.

At the oil and gas company, pricing emerged as one of the obvious gaps—a capability too valuable to simply hand over. Energy is a dynamic market, with prices that change continuously throughout a trading day; a refinery’s ability to take market information and know what to bid for a given set of deliveries is crucial to its ability to make a profit. Yet this was not a capability the oil and gas company felt it could cut loose. After all, it was keeping other refineries, and they also drew on this capability.

The seller identified two main options for dealing with this dilemma. The first was sharing its pricing capability with the buyer—letting the buyer tap into the systems and processes that the seller already had in place. The second option was providing the buyer with the mechanical part of its pricing capability (the hardware and basic software) after stripping out the algorithms and the bulk of the system’s intelligence. And of course it was possible that the buyer would have a sophisticated pricing capability of its own, and not need any part of what the seller had to offer.

The seller could not assume that this would be the case, however, so it analyzed the relative impact of each option. This is a key part of this step. Sharing the pricing system was going to be very complicated, both in terms of the technology and from a regulatory perspective, since the owners would be operating refineries in different states within the U.S., with different environmental laws. Dividing up the system was going to be an equally big job, and would leave the buyer having to fill in many software blanks and re-create processes that were already locked down. Ultimately, though, the oil and gas company determined that the second option, dividing up the system, was better; it would eliminate a link that could interfere with both companies’ business processes later on. The information it got from the analysis was instrumental in helping the oil and gas company start the preliminary work of dividing the system—even before it found a buyer.

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