What do firms need for a successful divestment plan?
Divestments play a huge role in companies as they aim to reposition themselves to achieve growth. How best can executives create strategies to bring value to business after divesting?
In 2018, Centum sold its stake in micro financier Platinum Credit. The proceeds of the sale at the time, would enable the investment company to deploy capital in other investment opportunities across its focus areas.
The divestiture from Platinum Credit saw it gain over KSh.1 billion.
Divestment or disinvestment means selling a stake in a company, subsidiary or other investments. Generally, businesses and governments resort to divestment as a way of cutting losses from a non-performing asset, exit a particular industry or raise money.
According to the latest Ernst & Young, Global Corporate Divestment Study 2021, nearly eight out of every 10 companies say they didn’t meet price expectations in their most recent divestiture. At the same time, 56 per cent say their most recent divestment did not generate good value for the remaining businesses as they planned.
Divestments can fail especially when they are treated as one-off decisions based on short-term financial factors, rather than being closely aligned with the overall corporate strategy. In fact, nearly 60 per cent of CEOs acknowledge they should provide better guidance as to what they regard as core and non-core businesses before any sale is done.
With all these in mind, how best can top executives ensure they create better strategies that provide better divestment sales, which brings value to their remaining businesses?
Determine which assets are core
CEOs need to determine which businesses no longer help drive the company’s strategy, which are deemed non-core, by taking a broad view on how a company generates long-term value for stakeholders. Many still struggle to define which businesses in their portfolios are core or non-core, while others consider alignment to the company vision or mission a key factor in identifying divestments. This suggests that, in some cases, strategy may not be the driving force behind decisions, with short-term financial factors instead taking the lead.
Define how each business contributes to long-term value
Definition of long-term value goes beyond the traditional measure of financial value. The latter neglects key metrics that are becoming more important to stakeholders and boards — and which can often now affect financial value. These include how a business is viewed by and affects customers, employees and society. Analysis should measure and communicate long-term value drivers across four dimensions which includes, financial value, customer value, people value and societal value. CEOs can use these factors, when considered as part of the long-term strategy, to understand if an asset is in the best hands or should be divested.
Widen your definition of value drivers
As market conditions and stakeholder demands change, companies should revisit value drivers. Even well-performing businesses can be prime candidates to carve out or spin off if they no longer fit the long-term strategy, as they tie up capital that could be better deployed on investments that have a more substantial impact on long-term value.
Rally stakeholders with a consistent narrative.
CEOs can rally employees, customers and investors behind divestments by showing how the portfolio change supports the company’s strategy and can help drive long-term value. A strategic narrative also helps overcome inevitable legacy emotion and internal politics, which can be powerful forces in debate over company structure. Stakeholder messaging should demonstrate how the business has been evaluated. This can include go-to-market approaches, cost synergies from related products and technology or geographic coverage.
Consider your target market for each business.
Have a clear view on each business’s market and underlying growth in demand, competitive advantage, alignment to the company’s vision and potential for long-term value creation from a financial, customer, people and societal standpoint. Pursuing divestments can help accelerate investments in technology, new products and geographies to meet customer needs.