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[Music]
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what causes Executives to delay or avoid
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divestitures even when it is evident
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that these transactions will help their
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companies and in some cases save them
00:00:09
from decline or even Extinction
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most fundamentally divestitures suffer
00:00:14
from Bad public relations they tend to
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be viewed as a last resort to use when
00:00:18
something is going wrong like an
00:00:20
acquisition that isn't working out or a
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business whose performance is
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deteriorating perceived Financial
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constraints can impede divestitures as
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well generations of Executives have been
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advised to milk not divest their cash
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cows
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after all how does one justify
00:00:36
eliminating a predictable source of cash
00:00:38
especially a source of cash for which
00:00:40
potential buyers might not pay an
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acceptable price
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can also deter divestitures what does it
00:00:48
mean to get rid of the Legacy business
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around which a company was built
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especially when that company's name
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reflects those original operations or
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when that divestiture will cost many
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long-time employees their jobs
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[Music]
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welcome to the ripple effect the podcast
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that takes you on a journey through the
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minds of work and faculty I'm your host
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Dan Loney and in each episode we'll be
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diving deep into the inspiration behind
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the groundbreaking research that Wharton
00:01:14
professors have conducted and exploring
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how their findings resonate with the
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world today we'll be covering a diverse
00:01:21
range of topics bringing you the latest
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insights and knowledge that you can
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apply to your life into work so get
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ready to dive into new ideas with the
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ripple effect
00:01:33
while agreed to be joined by Emily
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Feldman Wharton management Professor
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Emily great to talk to you again how
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have you been hey Dan so good nice to be
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here great to great to be with you great
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and so obviously an important book that
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you have written uh talking about
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divestitures I should say the title is
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divest Insurance creating value through
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strategy structure and implementation
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give us a little bit of the back story
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on what it was that drove you to want to
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do a book on this uh on this segment
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yeah thanks so it's a great question and
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you know this is a topic that has taken
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a lot of importance in my in my research
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uh over the past you know 15 years that
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I've been at Wharton now so I actually
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started studying divestitures when I was
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a graduate student back in uh in my PhD
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program and you know just kind of
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recognized that these were understudied
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in the academic realm uh and so this
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kind of spiraled into just a bigger
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research agenda that I you know
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continued pursuing throughout grad
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school and then when I got to Wharton as
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well
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um and you know as I kept working on it
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the more I worked on it the more that I
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realized that you know among
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practitioners among
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um you know consultants and bankers and
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you know sort of the World At Large
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right these were sort of under
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recognized as well and so I I decided
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that you know the time had come to try
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to really you know produce a
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practitioner-oriented book that could
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speak to these uh these issues and you
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know talk about you know what some of
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the misconceptions around these
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transactions might be as well as you
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know some of the realities of of what
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they do and and how they work and how
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they can really help companies uh in
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their strategic objectives so that's
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really what motivated me to work on this
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book so obviously for a lot of the
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people that are kind of in the banking
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sector this is a very important topic
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for them but for the public at large
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what is it that in doing this book you
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want to try and bring to light do you
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think yeah for sure I think it's a very
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simple but important message right so
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you know the world focuses on mergers
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and Acquisitions right you read a
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headline about mergers and Acquisitions
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it's flashy it's sexy right synergies
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growth opportunity right all these great
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happy
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um you know things that are associated
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with these these expansionary
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transactions and it's quite the opposite
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when you read about divestitures if you
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even do read about these transactions
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it's much more you know oh the company
00:03:42
is having problems or business is
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failing or a merger didn't work out or
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something went wrong and so you know I
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think the message of these are not just
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sort of failures or strategies or
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transactions to do when something has
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gone wrong but rather that they provide
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real strategic opportunities for
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companies to focus and realign
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operations to reconfigure resources and
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to achieve you know operational and uh
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you know stock market performance
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improvements is really the message for
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for kind of the public at large and I
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think that's a very important message
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given the misconception that I started
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out with
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right and so the the the term
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divestiture give us your best case
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explanation for the public at large as
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to what a divestiture truly is yeah for
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sure and that's that's a really
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important question right so a
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divestiture you know plain and simple is
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a transaction that a company can use to
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remove one of its business units a
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subsidiary a division that it might have
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us as part of its operations right so
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basically we're talking about getting
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rid of something that's part of a
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company's existing operations
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um and so there's there's various
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different ways and I'm sure we'll get
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into this later but there's various
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different ways that companies can uh
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accomplish divestitures or do
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divestitures right so you could sell a
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business you could spin it off you could
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do other types of transactions but in
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broadest terms right a divestiture is
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the removal of one of those business
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units
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are there and there are a variety of as
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you said different elements different
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types out there but are there ones that
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seem to be more popular more attractive
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than others yeah definitely yeah yeah so
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uh popular yes attractive is a trickier
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question but I'll try to answer each of
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those right so by far the most common uh
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way that companies will divest is to
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sell something right so I have a
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business unit that I don't want anymore
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or that I'm trying to get rid of so I
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sell it to another company or I sell it
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to private Equity or something like that
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right so sales actually account for
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about 95 percent of all divestiture
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activities So Far and Away the most
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common
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um spin-offs are the second most common
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right so in a spin-off what happens is
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that a company issues shares in the
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business unit that it is divesting to
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its existing shareholder base right so
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if you're a shareholder of the parent
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company you automatically will get
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shares in the spin-off company in the
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business that's being divested so it's
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not the same thing as a sale but rather
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what's happening is that the spun off
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business becomes a its own publicly
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traded company that's separate and
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distinct from the parent company that it
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used to be a part of so spin-offs
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account for about two to three percent
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of all of all divestiture activities so
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much less common than uh than than sales
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but but still the second most common and
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then there's a whole other range of much
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much less common divestitra structures
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like reverse Wars trusts or joint
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ventures Equity carve outs right and the
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like that can be used to accomplish
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different things and this ties to your
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comment about kind of attractiveness of
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these different types of divestiture
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structures so what's really interesting
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and and I think one of the biggest
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insights that I got just in the course
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of researching and writing my book was
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you know actually each of these
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transaction types can really accomplish
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very specific Financial objectives in
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terms of generating cash in terms of
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managing tax burdens in terms of uh you
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know getting an acquirer potentially to
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pay for synergies and so on and so forth
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so it's not to say that one is always
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more attractive or less attractive than
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another or but rather to say that these
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transaction types or these structures
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need to be used depending on what it is
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that the company is trying to accomplish
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through that transaction
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so if attractiveness may not be the
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proper word would it be easier to say
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that when you're talking about each of
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these there are probably pros and cons
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that go along with with each each
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different type yes very much that's a
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great way to put it
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speaking specifically like lets you
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spin-offs as the example when you're
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talking about spin-offs what are some of
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the pros and cons that you end up seeing
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yeah for sure so the biggest one far and
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away is that these can be tax-free
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transactions under certain circumstances
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right so they're a great way actually
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for companies to try to manage the tax
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burden from uh from divestitures and the
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easiest way to see that is to contrast
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them to sales right so if you sell a
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business to another company you're
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getting cash right for some kind of
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consideration but usually cash and so
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that's going to be a taxable transaction
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but because in a spin-off there's no
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cash that's being generated You're
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simply issuing shares in that business
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unit no cash is really changing hands
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and so these are these can be tax-free
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transactions depending on whether you've
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met certain kinds of conditions right so
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that's a huge advantage of a spin-off
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relative to a sale for example one of
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the biggest disadvantages of uh
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spin-offs of course is the potential for
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conflicts between the company that's
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doing the divestiture the parent company
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and the business that's being spun off
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the spin-off company and the reason is
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that in most cases the parent company
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will direct the process of going through
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that spin-off and so a lot of times the
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spin-off company doesn't have much of
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any involvement in terms of how it's
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being set up right so whenever things go
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wrong or maybe not whenever but
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oftentimes when things go wrong after
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the spin-off that is used as a basis for
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saying oh well I didn't have a I didn't
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have a say in this right so that's where
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the conflicts really start to come up
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between these types of companies so that
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would be a big disadvantage of spin-offs
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relative for example to a sale where
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this would not necessarily be the case
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right and so yeah you can go through
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each of these transaction types and sort
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of explain like relative to one another
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you know what are the advantages what
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what are the disadvantages and my book
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kind of goes through and sort of lays
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out these uh these considerations but
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it's actually really fascinating
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um you know strategy in and of itself
00:09:20
right to sort of say well we have to
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think very carefully about you know what
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are the objectives that the specific way
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that we're going to do the divestiture
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can accomplish and match accordingly
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right and and there's that decision
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process between the potential idea of
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selling an entity in comparison to maybe
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spinning it off and again it's going
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through that process the corporate
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structure going through that process to
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understand which might be the best path
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to take it yeah very much and I I really
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hope that one of the effects of my book
00:09:48
is to help to maybe
00:09:51
um mitigate a little bit of the the the
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storytelling that goes on around these
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transactions right so for example a lot
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of times what I'll hear when I'm talking
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to companies is oh I don't want to do a
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divestiture because if I divest this
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business I'm going to have a huge tax
00:10:04
bill right and that might be true if
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you're selling it but have you thought
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about these other modes of divestiture
00:10:09
spin-offs and perhaps others as a way of
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maybe not having a huge tax burden uh
00:10:15
when you're doing the sevestiture right
00:10:16
so I think that there's a lot more
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element of choice maybe than managers
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realize
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um when when it comes to undertaking
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these transactions so I hope my book
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starts to correct some of those uh some
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of those ideas but when you think about
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where what a company is at a particular
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moment and where they would like to go I
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think a lot of the discussion ends up
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around the value of the company but also
00:10:39
the performance of the company as well
00:10:41
correct correct yeah and I think that's
00:10:43
another really important aspect so we've
00:10:45
been talking about structure so far in
00:10:47
terms of how companies can do
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divestitures but I think what you're
00:10:50
kind of talking about is is sort of the
00:10:52
strategy element which is you know why
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why would we even think about doing
00:10:55
these transactions in the first place
00:10:57
what are they going to help us
00:10:58
accomplish and how might they help us to
00:11:00
improve our performance right and
00:11:02
performance in terms of operating
00:11:04
performance or perhaps share price stock
00:11:06
market performance and so you know the
00:11:09
whole first part of my book actually
00:11:10
goes through and you know talks about
00:11:12
these different strategic objectives
00:11:14
that divestitures can help companies
00:11:16
achieve and why they might be valuable
00:11:18
under these different circumstances
00:11:20
Are there specific examples you've seen
00:11:22
where that component of focusing on
00:11:25
performance or or that corporate value
00:11:27
has played out that we've seen in the
00:11:30
news oh very much yeah I mean I think
00:11:32
we're seeing it very uh very intensively
00:11:34
right now so for example one of the big
00:11:36
strategic reasons why companies uh
00:11:39
should and often do think about
00:11:40
divesting is to improve corporate Focus
00:11:43
right so this is basically the focus so
00:11:45
if I may of of chapter two of my book
00:11:48
um and so what I talk about there is
00:11:50
okay so you have a company that has a
00:11:52
number of different business units and
00:11:54
perhaps you are having difficulty you
00:11:57
know allocating resources to one of
00:11:59
those areas perhaps uh the the number of
00:12:02
different businesses that you have is
00:12:04
confusing to uh external constituents
00:12:07
like Securities analysts or investors
00:12:09
perhaps There's issues of resource
00:12:12
allocation and so on and so forth right
00:12:13
so there's lots of different reasons why
00:12:15
Focus might be desirable
00:12:17
and so what my research shows first of
00:12:19
all is that when companies do these
00:12:21
Focus improving divestitures that we do
00:12:23
actually end up seeing these performance
00:12:25
improvements that we've been talking
00:12:26
about and so you know we're seeing a lot
00:12:28
of this right now actually so if you
00:12:30
look at GE it's a great example uh so GE
00:12:33
of course after you know a huge wave of
00:12:36
kind of slimming down uh basically did
00:12:38
the you know the final the final blow
00:12:40
there uh in terms of breaking apart
00:12:42
Healthcare Aviation and I believe
00:12:44
Environmental Services is the third
00:12:45
business if I'm not mistaken so breaking
00:12:47
those three apart and allowing each of
00:12:49
them to kind of stand on their own to
00:12:51
feed and have their own corporate Focus
00:12:53
or Johnson Johnson is another great
00:12:55
example or uh Kellogg's from last summer
00:12:57
is a third grade example right so you
00:13:00
know cereals has a very different uh
00:13:03
growth trajectory and profit margins
00:13:05
than uh snacks right snacks are better
00:13:07
basically and plant-based foods are you
00:13:10
know very uncertain right depending on
00:13:12
where consumer tastes goes so it's sort
00:13:13
of hard to say
00:13:15
um and so you know how do you keep those
00:13:16
businesses in the same and portfolio
00:13:18
right the idea of sort of separating and
00:13:20
allowing each of them to be independent
00:13:22
is kind of a key motivation for for the
00:13:24
for for those three kinds of
00:13:26
transactions it also seems like we were
00:13:29
also seeing more consideration on these
00:13:31
potential divestitures because of the
00:13:34
regulatory side and and I think that's
00:13:36
an area where a lot of people will will
00:13:38
look to focus especially if there's more
00:13:40
and more transparency around the company
00:13:42
that they can truly understand what the
00:13:44
company is doing and why they're trying
00:13:46
to do it very much yeah and so you know
00:13:48
regulatory regimes have changed
00:13:50
obviously very very significantly right
00:13:52
so for example right now we're in an era
00:13:54
of much more robust Anti-Trust
00:13:56
enforcement uh and of course Anti-Trust
00:13:58
and competition is a is a huge
00:14:00
motivation for divestitures uh when
00:14:02
companies do M A's or certain M A's a
00:14:04
lot of times they'll be required to
00:14:06
divest certain businesses as part of
00:14:08
those transactions right to try to
00:14:10
mitigate anti-competitive or potentially
00:14:11
anti-competitive effects that might
00:14:13
result uh from their M A transactions so
00:14:16
I imagine that we'll see a lot more
00:14:18
activity in terms of trying to mandate
00:14:20
divestitures from a from a regulatory
00:14:22
perspective along that Dimension another
00:14:25
area is National Security so cypheus is
00:14:28
another reason why companies will often
00:14:30
be required to divest certain Assets in
00:14:33
response to kind of managing National
00:14:35
Security interests right so another area
00:14:37
of huge importance right now in the
00:14:39
regulatory environment so so absolutely
00:14:40
and I think this point is an important
00:14:42
one because it helps to distinguish
00:14:44
between if you will kind of the pure
00:14:47
strategy motivations like we're doing a
00:14:49
divestiture to achieve a particular
00:14:51
strategy versus being required to do a
00:14:54
divestiture perhaps as part of something
00:14:55
else that's going on maybe from a
00:14:57
regulatory perspective so I think it's
00:14:59
it's it's interesting to distinguish
00:15:01
between those uh those two aspects but
00:15:04
what do companies have to look at when
00:15:05
they're considering a divestiture to
00:15:08
make sure that the process goes smoothly
00:15:11
for them they don't want to obviously
00:15:12
you know hit a pothole along the way to
00:15:16
use that terminology uh and cause a
00:15:18
significant negative impact to their
00:15:20
bottom line yeah it's a great question
00:15:22
and so you know implementation with any
00:15:24
kind of corporate transaction is tricky
00:15:26
right so I think this is probably the
00:15:28
biggest Pitfall that we see with mergers
00:15:30
and Acquisitions uh and and equally so
00:15:32
perhaps when it comes to divestitures
00:15:34
right the devil is in the details of of
00:15:36
kind of managing implementation
00:15:38
so when it comes to divestitures you
00:15:40
know there's a lot of detail in the book
00:15:42
obviously about the different things
00:15:43
that companies need to pay attention to
00:15:45
but if I had to highlight three I think
00:15:46
I would say the following the first
00:15:48
would be to try to you know be very
00:15:52
clear about managing shared resources
00:15:54
and shared liabilities that need to be
00:15:57
divided between uh the divesting company
00:15:59
and the divested business right so you
00:16:02
know it's easy for example if you have
00:16:04
something that's very clearly applicable
00:16:06
to the divested business it just goes
00:16:07
with the divested business after the
00:16:09
divestiture but unfortunately the
00:16:11
reality in many companies is that it's
00:16:13
not that simple right and so a lot of
00:16:15
times there are shared resources there
00:16:17
are shared people there are shared
00:16:19
functions like human resources that are
00:16:21
hard to kind of disentangle shared
00:16:22
expenses and so that process of
00:16:25
disentangling is is complicated right so
00:16:27
I would say you know don't underestimate
00:16:29
the process of disentangling shared
00:16:32
resources and shared liabilities and
00:16:34
expenses and kind of manage those uh
00:16:36
those carefully when it comes to
00:16:37
divestiture implement education so
00:16:39
that's one one Pitfall to watch out for
00:16:41
the second would be managing cost
00:16:43
structures right so on average when
00:16:46
companies divest right what you end up
00:16:48
seeing is that their sales decline uh by
00:16:51
about 25 right so the average
00:16:52
divestiture reduces a company's sales
00:16:55
um by about a quarter right so that's
00:16:57
kind of the average size of those
00:16:58
transactions but what's interesting is
00:17:00
that so you would think that the cost
00:17:02
structure of those companies should
00:17:03
decline after these transactions but
00:17:05
what's really interesting is that they
00:17:06
don't and quite the opposite the cost
00:17:08
structure of the divesting company after
00:17:10
these transactions increases by about 20
00:17:13
percent so that is problematic right
00:17:16
because basically divestitures need to
00:17:18
be used as an opportunity to sort of you
00:17:20
know cut the extraneous things that are
00:17:21
no longer there but if companies are
00:17:23
increasing their cost structure that's
00:17:24
the wrong direction right so uh the
00:17:27
second lesson that I would offer the
00:17:28
second Pitfall that I would offer is be
00:17:30
sure to manage costs carefully when uh
00:17:33
going through these transactions because
00:17:34
a lot of times you will end up with a
00:17:37
bigger cost structure than you need or
00:17:38
want after these transactions if you're
00:17:40
not careful about it and then the third
00:17:42
thing I would say is use divestitures as
00:17:46
an opportunity to kind of reconfigure
00:17:48
right and I think this is often
00:17:49
underutilized as well right so in the
00:17:52
sense of saying look you know what do we
00:17:54
want to do differently after this after
00:17:55
this transaction what do we not want to
00:17:57
invest in what do we want to invest in
00:17:59
that can help grow our business Beyond
00:18:01
its existing boundaries and you know use
00:18:04
that transaction as a catalyst right or
00:18:06
an opportunity to kind of reposition the
00:18:08
organization to go in that different
00:18:10
strategic direction right it's not just
00:18:12
a one-off like oh we're getting rid of
00:18:13
something but rather it's something more
00:18:15
in terms of saying we can we can reshape
00:18:17
we can do something different after
00:18:19
these transactions so that's the third
00:18:20
lesson I would offer
00:18:22
how frequent do we see now and maybe
00:18:25
have we seen in the past uh when the
00:18:28
potential of a divestiture occurs that
00:18:31
it's more engaged a company is looking
00:18:32
at a specific like segment line within a
00:18:35
company in comparison to the larger
00:18:37
company as a whole
00:18:39
yeah so uh that's a good question so I
00:18:42
think that you know with divestitures
00:18:43
I'm I'm talking more about kind of the
00:18:45
segments as opposed to kind of the
00:18:46
company as a whole but you're right that
00:18:48
companies can of course sell the entire
00:18:49
entity to another organization and and
00:18:51
that does happen right so I think that
00:18:54
you know we we see um we tend to see
00:18:56
sort of the full-scale uh full-scale
00:18:58
types of sales right in situations of
00:19:01
perhaps distress or you know sort of
00:19:03
opportunities that need to be taken by
00:19:05
by a different owner right so private
00:19:07
Equity is a great example or private
00:19:09
Equity is is um you know often utilized
00:19:11
in these kinds of situations
00:19:13
um so so I think that's an interesting
00:19:14
distinction between sort of the more
00:19:16
kind of corporate divestitures that the
00:19:17
book is focused on versus kind of these
00:19:19
full-scale uh sales of companies
00:19:22
and again what is it that you would like
00:19:24
the reader to to really take away from
00:19:26
from reading your book yeah definitely
00:19:28
so I was talking before about that under
00:19:30
utilization right so I I quoted those
00:19:32
statistics about how infrequently
00:19:34
divestitures are utilized in comparison
00:19:36
to their expansionary counterpart
00:19:38
mergers and Acquisitions so here's the
00:19:41
the killer statistic for me right if
00:19:42
there's one takeaway this is what it
00:19:43
would be if you look at the performance
00:19:45
implications of divestitures versus
00:19:47
mergers and Acquisitions we actually see
00:19:49
that the divestitures outperform the M
00:19:51
A's by two to three times in terms of
00:19:53
their shareholder value and that
00:19:55
different difference persists for up to
00:19:57
36 months after the completion of these
00:19:59
transactions so that's the pathology
00:20:01
right we don't do these transactions
00:20:04
even though they actually create more
00:20:06
value for companies than the
00:20:07
transactions that we are actually
00:20:09
focusing on right headline like wait
00:20:10
we're doing the wrong thing pretty much
00:20:12
when it comes to maximizing shareholder
00:20:14
value improving performance right so
00:20:16
divestitures need to enter the
00:20:18
conversation right divestitures need to
00:20:19
be as much a part of that conversation
00:20:21
as mergers and positions are because
00:20:23
clearly they are a lever that companies
00:20:25
can pull uh to create outside
00:20:27
shareholder returns for their for their
00:20:29
companies
00:20:31
well Emily thanks very much for your
00:20:32
time all the best with the book uh enjoy
00:20:35
the rest of your summer thanks Dan great
00:20:36
to talk to you you got it Emily Feldman
00:20:38
Wharton management Professor her book
00:20:40
divestitures creating value through
00:20:43
strategy structure and implementation
00:20:46
thank you for listening to the ripple
00:20:48
effect we hope you found this episode
00:20:49
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