Combine the #1 Indicator With Other Considerations
By M&A Leadership Council
Divestiture, the process of selling or liquidating a portion of a business, is a crucial strategic decision companies face.
Timing, in this context, is not just a factor but often the determinant of success.
Knowing when to let go can be the difference between capitalizing on an opportunity and incurring substantial losses.
#1 INDICATOR: Declining Financial Contribution to the Overall Organization
One of the most telling signs that it's time to divest is consistently declining financial performance. This indicator is paramount because it directly impacts the bottom line.
Key metrics to monitor include:
- Return on Investment (ROI): A significant and sustained drop in ROI could suggest that the assets are no longer generating sufficient value and might be better off under new ownership.
- Profit Margins: Shrinking margins can indicate increasing costs, decreasing sales, or both, signifying that the business unit may no longer be sustainable.
While declining financial performance is a primary indicator, several supporting signals can also guide the divestiture decision:
- Market Trends and Industry Shifts: Changes in consumer preferences or disruptive technologies can render a business unit obsolete.
- Changes in Consumer Behavior: A significant shift in customer needs or behaviors can undermine the relevance of a product or service.
- Regulatory or Geopolitical Changes: New regulations or changes in the geopolitical landscape can affect the viability or profitability of a business unit.
In addition to financial and market indicators, strategic alignment is crucial. Divesting from a business unit that no longer aligns with the company's core strategy can free up valuable resources and allow the company to focus on areas with higher growth potential.
The intricate dance of timing, market conditions, and strategic foresight can be seen through the lens of real-world examples. The contrasting divestiture tales of Procter & Gamble (P&G) and eBay serve as insightful case studies. While P&G's strategic divestiture of its beauty brands to Coty Inc. marked a textbook example of leveraging a strong market position and precise timing, eBay's sale of Skype epitomized the complexities and potential pitfalls of divesting prematurely or without a clear strategic alignment. These cases illuminate the nuanced spectrum of outcomes in divestiture decisions, shaping a comprehensive understanding of how the #1 indicator, alongside other critical factors, drives the strategic decisions leading to divestiture.
CASE STUDY 1: Beneficial Divestiture
- Name: Procter & Gamble (P&G)
- Context: P&G's divestiture of its beauty brands to Coty Inc. in 2016
Analysis of Timing and Indicators:
- Indicators: P&G recognized the need to streamline operations and focus on more profitable core businesses. The beauty brands were underperforming in comparison to P&G's other sectors.
- Timing: The decision was made when the market for beauty products was still robust, ensuring a favorable sale price.
P&G successfully divested 41 beauty brands to Coty Inc. for $12.5 billion. The move helped P&G focus on its core businesses, resulting in a leaner, more profitable company structure.
CASE STUDY 2: Unfortunate Divestiture
- Name: eBay
- Context: eBay's divestiture of Skype in 2009
Analysis of Timing and Indicators:
- Indicators: eBay acquired Skype with the intention of integrating it with its e-commerce platform, but the synergy was never realized.
- Timing: The divestiture was perceived as a loss, as eBay sold Skype at a value lower than its purchase price, and later, Skype's value significantly increased under new ownership.
eBay sold Skype for approximately $2.75 billion, less than what it paid for. The decision was criticized as premature, especially as Skype's valuation soared after its integration with Microsoft.
The successful divestiture by P&G was marked by strategic foresight and optimal timing, while eBay's costly divestiture was plagued by an inability to strategically integrate and poor timing. Key lessons include the importance of ensuring strategic fit and market timing when considering divestitures.
Recognizing the right time to divest is a multifaceted decision, with declining financial performance often serving as the primary alarm bell. However, it's the combination of financial, market, and strategic factors that should guide the final decision. Timely and strategic divestiture can pave the way for growth, innovation, and sustained success.
Learn more about indicators and strategic considerations at any of our upcoming virtual or in-person training courses, where you'll interact with peers in small-group breakout sessions, explore case study deep-dives and absorb the war stories and real-world experiences of working presenters. See our Training Calendar for more details and registration.