What’s keeping you from divesting?
Active portfolio management can create significant competitive advantages. Still, executives routinely shy away from separations. Here are six common roadblocks and some tips for breaking through.
By Gerd Finck, Jamie Koenig, Jan Krause, and Marc Silberstein – You’ve taken a close look at your portfolio and identified the assets that are no longer strategic priorities. Now what? Logic would dictate that you kick off a divestiture process—that is, you would convene a deal team to define key process steps in the separation and then market the assets in question to potential buyers.
A recent survey of business leaders, however, confirms that this process gets abandoned more often than not, for a variety of reasons—among them, senior management’s perceptions that disentangling the assets will be too complicated or that there will be few interested buyers. Executives and boards often fear that divestitures will reduce the size of a company in ways that will make it difficult to replace earnings.
Such fears are often unfounded. In fact, research continues to mount in favor of active portfolio management, in which companies constantly redeploy their capital toward areas of the business where industry dynamics and their competitive advantages maximize returns on invested capital (ROIC). A recent McKinsey study shows that among companies in the sample, the 23 percent that regularly refresh 10 to 30 percent of their portfolios through acquisitions and divestitures outperform the others in total returns to shareholders (TRS) by an average of 5.2 percent a year.
A recent survey of 128 senior business leaders helped us pinpoint the most common obstacles to divestitures. Executives said one or more of the following six concerns had prevented them from pursuing a divestiture in the past ten years: misperceptions of asset value, underestimating buyer interest, concerns about damage to the rest of the business, concerns about timing, fear of sunk costs, and emotional attachment to the asset (Exhibit 1). With 52 percent of the respondents also indicating that they expect to conduct divestitures in the next 18 months (Exhibit 2), now is the time to confront these challenges. In this article, we take a close look at each obstacle and suggest possible moves business leaders can take to overcome them. more>
- Why you’ve got to put your portfolio on the move, Sandra Andersen, Chris Bradley, Sri Swaminathan, and Andy West