Why the divestment of underperforming business units can be a smart play

Today’s business environment is one of continuous change. Amid fast-paced technological innovation, shifting consumer demands and increased investor scrutiny, companies have no room to idly sit by and maintain the status quo.

Top priority for executives today is facilitating financial growth and deriving more value from their company. For many businesses, divestments are now a fundamental part of their strategy and a common tactic in an executive’s business arsenal. While a focus remains on acquisitions, turning toward divestments to reinvest in core business activities, expand into new markets and develop new products can lead to longer-term growth and increased value for shareholders.

While divestments around the globe are prevalent, the outcomes for businesses are not always financially advantageous. Of the 700 global corporate executives surveyed for EY’s 2014 Global Corporate Divestment Study, more than half of companies made a major divestment during the last two years.
Eighty-eight percent, however, left money on the table and no company can afford to lose deal value.

Get strategic

Leaving money on the table doesn’t need to be common practice. The survey revealed not a trend, but a truth: By utilizing strategic portfolio management to assess the long-term contributions of each business unit, companies are able to yield better divestment outcomes. And of those surveyed, 80 percent of executives agreed this was the case.

In particular, companies actively reviewing their portfolios can determine how to allocate capital in alignment with the core strategy and how to effectively meet current and future market needs. They can also look at the value of each business unit on a stand-alone basis and its contribution to the entire organization, as well as whether to divest or invest additional capital in a particular business.

The following are leading practices companies should consider when undertaking a divestment:

Know your core business

By assessing core competencies, redefining operating models and understanding competitive differentiators, executives can improve their companies’ investment focus. In the survey, 85 percent of respondents saw an increased valuation multiple in the remaining business by basing the divestment on an updated definition of core operations.

Adhere to data and industry benchmarks

During portfolio reviews, senior leadership should call upon diversely skilled teams to analyze business unit performance and industry benchmarks. Executives believe improved industry benchmarks (45 percent) and better business unit data (39 percent) would increase their portfolio review efficacy.

Act strategically

Divestments are strategic tools. Thinking about them as such and acting on portfolio review findings increases valuation multiples post-sale. More than half of executives surveyed believe portfolio reviews would be more valuable if companies dedicated resources to act on review results.

Overarching business goals often stem from the desire to derive value. By divesting business units that are no longer strategically aligned, companies are able to reallocate capital to higher-growth areas, helping them create a more focused, better defined organization that investors value.