Books For MBAs: Wharton Prof’s Groundbreaking New Work On Corporate Divestitures

The Wharton School’s Huntsman Hall. Courtesy photo

What are some most interesting divestitures you’ve seen in 2022?

It’s been a big year, actually, for divestitures. The one that rolls off of everybody’s tongue is GE, of course, because that is a huge company that’s very well known. I actually write about it in the introduction to the book.

GE is a great example of over diversification. It started with GE light bulbs and then the company diversified into lots of different businesses, but all were sort of united by this core competency of industrials. And then we have GE Capital.

GE Capital doesn’t fit with the rest of its industrials business, but it pays for everything because it’s throwing off tons of cash. Even though there were warning signals that maybe GE Capital wasn’t a good fit, that maybe it should pursue other opportunities on the industrial side instead of continuing to invest in the financial side, GE held on for too long – as is often the case. Ten years go by, and by the time they actually decide to divest, the whole portfolio kind of breaks apart.

So they divest all these different things culminating this past year in their three-way separation of aviation, healthcare, and environmental. It’s a great example of recognizing that divestitures need to be used proactively to remove businesses that are not not a good fit. The ultimate culmination is that lack of recognition, probably starting back in like 2015. It should have happened a lot sooner.

Another example that happened this summer was Kellogg’s announcement that it was breaking apart into cereal, snacks, and plant based foods. This is a set of businesses that have completely different opportunities. Cereal is slow and steady. Snacks have a lot of growth and excitement, while plant-based foods are much more volatile. How do you allocate resources in a portfolio where you have all these different competing agendas and objectives? Do you allocate it to the slow and steady business? Do you allocate it to the really fast growing business? Do you allocate it to the volatile one in the hope that you capture the upswing?

That separation really illustrates this idea of having too many things moving in too many different directions. It’s confusing to the investment community, it’s hard to manage internally. Divestitures help clarify and simplify and let each of those pieces stand on its own.

How do your MBA students react to the strategy and value creation that can be achieved through divestitures? M&A seems more flashy and exciting, but I imagine that seeing the strategic opportunities of divestiture can be exciting as well.

It’s exactly what you just described, and it’s very gratifying actually. Professors, at least I do, kind of live for the “aha” moment. When you know that you’ve taught something effectively in a classroom and you see the light bulb go off.

Emilie Feldman

The MBA class that I teach is “Corporate Development: Mergers and Acquisitions.” So, the first third of the class is about different strategies, alliances, and corporate venture capital. The second two thirds is about M&A, which is lots of big splashy deals. Everyone likes M&A, and it’s fun to teach.

But then, I always purposely save divestitures for the very last day of class. “So now I’m going to tell you why we need to think differently about everything else that we just talked about. Divestitures are a third of deal activity, but they create two to three times the shareholder value of mergers and acquisitions.”

People never think about divestitures, MBA students never think about it. But they are equally, if not more, important than the M&As that we just spent the whole semester talking about. I always feel at the end of that class that people wish there were two or three more sessions on this topic. I’d be happy to teach it, but my mandate is M&A and that’s what I teach.

It is cool to kind of change perceptions and to see people learn something that they hadn’t thought about before.

Going into 2023, with all the predictions of recession or at least an economic downturn, what do you expect to see in both M&A and divestitures?

M&A has had a tough year especially in the second half. Interest rates went way up, the stock market went way down, so deal financing became very expensive for mergers and acquisitions. It’s been pretty slow and steady with divestitures.

So for 2023, what’s interesting is that I think we’re still going to see some challenges on the M&A side: The stock market is going to continue to be volatile. I think interest rates are not coming down anytime soon. There’s lots of instability and uncertainty from geopolitical perspective and from regulatory perspective internationally.

Divestiture is kind of interesting when we think about it from that perspective. On the one hand, if fewer companies are buying, then that means there are fewer companies on the other side of that transaction. That might be kind of a dampening effect. However, we might see a lot of appetite from private equity to buy divested assets that companies are selling.

The other thing that we might see, though, is that if companies start to be a bit financially distressed, that might prompt many of the types of divestitures that I’m trying to change perceptions of. Many more of these situations where companies have a problem that they’re trying to fix through divestiture. So, it’s not exactly the message of the proactive strategic element of divestiture that I’m trying to talk about in the book, but more of the reactive element. Nonetheless, I think it might be a big part of the activity in this environment.

Why do you think companies don’t engage more proactively in strategic divestiture if it is so much more effective in value creation?

Part of it is the stigma that’s associated with it. But one point I want to emphasize, I guess, is that there’s almost always a good explanation for why we shouldn’t do a divestiture. One thing we hear is the cash cow story: This business is throwing off a ton of cash, so we can’t possibly divest it proactively because it’s paying for everything else. Even though it doesn’t fit, even though it is confusing the investment community, even though it’s messing up all these internal processes, we keep it because we have this explanation that we need the cash flow.

This kind of storytelling, I think, is a big impediment to seeing these transactions. Some of the explanations might be true to an extent, but they’re not always true enough to forego the opportunities that you could achieve if you did divest. I think too many companies kind of get stuck in these stories, and they never quite make it to the point where they can realize value from these transactions.

This, again, kind of comes back to my hopes for the book: That is the realization that there’s validity to some of these stories, but I think it’s important to have a toolbox with which to assess all of its merits. Is this actually the truth? Is divestiture the right decision for us? And, if it is the right decision for us, can we use the facts and findings in this research to overcome the stories?


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