When it comes to business deals, M&As get most of the love – in headlines and in B-school classrooms. They’re big, splashy, and come with all the intoxicating optimism of a shiny new acquisition.
But there’s another type of transaction that deserves our attention, says Emilie Feldman, an M&A expert and the Michael L. Tarnopol professor of management at The Wharton School. Corporate divestitures – the disposal of a business unit through sale, exchange, closure, or other means – create more than twice the shareholder value of M&A while making up less than a third of deal-making activity.
In her first book – Divestitures: Creating Value Through Strategy, Structure and Implementation – Feldman aims to dispel the stigma that divestiture is solely the result of some type of failure. To the contrary, proactive divestiture is another strategic tool that can result in significant managerial, operational and financial improvements for companies.
“I think the biggest thing for me (through this book) is to see the mindset change. I would like there to be a recognition that there is value creation potential in strategic divestiture, and that it isn’t just a sign of a mistake or something to be avoided at all costs,” she tells Poets&Quants.
“I’d like to see it enter the regular conversation of corporate strategy. If a company sees a great opportunity, it’s going to go by it. Similarly, if they see something that they are better off without and where they could reallocate resources to other parts of the company, there is nothing wrong with that.”
A STRATEGY TOPIC WITH LITTLE RESEARCH
Feldman is known for groundbreaking research on corporate divestitures, and her work has spurred greater interest in a topic with scant academic and practitioner study. Her book, released December 20 by McGraw Hill, is the first and only comprehensive book on the topic.
P&Q recently visited with Feldman about divestitures as a strategic tool and why the topic deserves more consideration by both MBA students and proactive executives. Our conversation has been edited for length and clarity.
Tell us a little about your professional background, and how you became interested in divestitures.
I started studying these transactions back in grad school at Harvard Business School. I was doing my PhD and looking for a dissertation topic as any good grad student would. I had always been interested in corporate strategy, meaning big transactions. I had done research on that topic in college, my dad is a bankruptcy lawyer, so it’s just kind of always been in my blood in a way.
I was scouting around that broad area, and the insight that really struck me was that there was tons of research on mergers and acquisitions: Expansion, going into new areas, buying stuff. But, if I buy something from you, you’re selling it to me, and there was so little that I could find on that reverse process. Of course, divestitures are bigger than just the sale. I thought there was actually a lot more to think about and to study.
The main part of my dissertation was about what happens when companies tried to divest their historical cores: Think GE getting rid of its light bulb business as a good example.
And when did you realize that divestiture deserved a more comprehensive examination as in your new book?
I came to Wharton in 2010 after grad school, and I realized that there was a ton more research to do on this topic. Research agendas kind of build on themselves in a sense, and I found myself 10 years later with all this research on this phenomenon of divestitures. I found myself teaching about it in my MBA classes. I found myself talking about it with executives and teaching about it in exec ed courses.
There were all these threads that were floating around divestitures, and I thought it was probably time to pull it all together. I had been wanting to write this book for a long time, and then COVID hit and there really wasn’t much else to do.
From a research perspective, I hope people continue to study this topic. I think there’s a lot more academic research that could be conducted, and I think there’s a huge range of issues that need more investigation.
Who is your target audience?
Obviously, I teach MBAs and they are a group that I speak to very naturally. A lot of times these transactions are underrecognized, and I wanted to offer something that speaks to that audience.
But then equally, as I’ve gone through my career and started to get more involved on the practitioner side and teach more executive courses, I wanted to speak to a practitioner audience at the same time.
I tried to hit those dual markets: students who might be taking a corporate strategy class at a business school and wanting to learn more about a topic that’s under studied, but also practitioners who might not realize the value creation potential of these transactions.
Why do you believe divestitures are so under researched? You mentioned that these transactions make up something like 30% of deal making activities.
I think the biggest thing is that there’s a bit of a stigma wrongly associated with these transactions. So the conventional wisdom we see a lot is that when a company is divesting it’s because something must have gone wrong. An acquisition didn’t work out, or there was some sort of mismanagement, or these other negative connotations. And it’s not true, which I talk about as well, in terms of what my research shows.
But, and this is one of the main points of the book, is that there are many proactive, strategic reasons why companies might want to divest. Not just in reaction to something bad happening, but because it’s a good strategy for their company. I think that’s a practitioner answer to that question.
The academic answer is just as divestitures are stigmatized in the real world, there’s this question of why would anyone want to study something that is perceived to be just a reaction to something bad. I think that that has held back the research from an academic standpoint.
The book makes the point that divestitures create double the shareholder value of M&A. Can you elaborate on that, because it sounds a little counterintuitive.
It does sound very counterintuitive, and I think it’s why a lot of times these transactions are sort of the hidden gem.
So when you acquire something, you’re buying something. You don’t necessarily know what you’re buying, you don’t necessarily know that the strategy that you have in mind is going to work. It could, but it also could not. There’s all kinds of pathologies in terms of paying too much, overestimating synergy potential, mismanaging post merger integration, and so on. M&A is super hard, both from a strategic perspective and from an implementation perspective. A lot of times, the outcome tends to be worse than the expectation in terms of value creation.
The flip side is why are divestitures creating so much value? Well, sometimes the story is, yes, we did something wrong, it didn’t work, and we have to get rid of it. Fine, that creates value because you’re undoing the mistake. But other times, the story is we have a finite set of resources within this organization that we can allocate to a number of different opportunities. We could keep putting money here, putting resources into this business, but what are we foregoing to do so? What’s the opportunity cost? Are there other areas that would benefit from more time, more attention, more money? It’s the process of getting rid of something to potentially do something else or even just to focus the portfolio and make it easier for the rest of the world to understand.
When we think about it from that perspective, there’s less chance of this mistaken strategy or messed up implementation. It’s freeing up resources to improve the company in the aggregate.
NEXT PAGE: Interesting divestitures from the past year
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