Journal of Applied Corporate Finance

S P R I N G 20 0 3 V O L U M E 15 . 3

The Art of Strategic Divestment

by Patricia Anslinger, Justin Jenk, and Ravi Chanmugan,
Accenture
THE ART OF STRATEGIC by Patricia Anslinger,
Justin Jenk, and
DIVESTMENT Ravi Chanmugam,
Accenture*

n a punishing economic climate, many companies turn to restruc-

I turing as a way to weather the storm. One way to do this, of course,
is to slash costs and reduce capital expenditure. A more dramatic
step is to sell off business units. This approach is not without risk, however, and
in the past, many companies have shrunk themselves to a level that made them
uncompetitive when the economy rebounded. Because 2001 was a record year
for corporate divestitures, there is cause for concern that some companies may
once again be making this same mistake.
Companies shed business units for a variety of reasons. Wall Street’s
demands to improve near-term earnings are relentless, and the temptation to
divest as a way to raise cash to maintain dividends, fund critical capital
expenditure, and pay down debt is hard to resist. However, divestiture makes
sense only as part of a sound, long-term strategy in which the company
constantly reviews, replenishes, and trims its portfolio as its markets change and
evolve. That is very different from selling a poorly performing unit at an
unattractive valuation, which is an all too common response to difficult
economic times.
Is there a smarter way to approach restructuring? Accenture believes there
are a number of alternative options. What is required, first and foremost, is a
willingness to consider all the possibilities: to look at ways to radically redesign
a business rather than divesting it; to put all of the business units—including
what seems to be the core business—on the table as possible candidates for
divestiture; and, finally, when the decision is made to shed a particular business
unit, to think of innovative ways to prepare it for sale. By examining all of the
alternatives to selling the obvious candidates outright, a company can increase
not only its options but also its chances of adding value for its shareholders.

*This article originally appeared in Accenture’s Outlook Journal (2003), Number 1 (www.accenture.com/Outlook).

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ACCENTURE JOURNAL OF APPLIED CORPORATE FINANCE
ASKING THE RIGHT QUESTIONS reduce costs. Within five years, AT&T expects to cut
customer service costs in half.
Companies thinking about a restructuring plan Have you pushed technology as far as you can,
that might include divestiture would do well to keep or are there still new ways it can be used to cut costs,
the following questions in mind. increase productivity, and improve operations? Cost
Rather than getting rid of an entire business cutting has been so aggressive and pervasive at times
unit, can you disassemble its operations and that it is difficult to imagine that more savings can be
outsource the costly or cumbersome functions? realized. But emerging technologies may offer new
This approach goes beyond traditional subcontracting, ways to shrink costs even further.
asset disposal, and conventional outsourcing. It means Consider the case of one of the world’s largest
changing the way you do business, from top to oil producers, which used reverse auctions to push
bottom—perhaps outsourcing even core functions down its procurement costs. In the past, the purchas-
that traditionally have been considered far too impor- ing department had solicited bids from a group of
tant to be performed out of house. But a company suppliers. To increase competition and reduce the
doesn’t necessarily need to own an asset to control it. prices it had to pay, the department started using a
In the spring of 2000, J Sainsbury, the second software program that enabled it to put out its
largest grocery retailer in the United Kingdom, found procurement specifications to qualified suppliers
its premier position slipping as several forces chipped over the Internet. The company set a deadline for
away at its performance. Costs were substantially out bids. Because the system was transparent, all of the
of line with those of industry leaders, and profits had suppliers could see and study their competitors’ bids
dropped 40% over the three previous years. Sainsbury during the bidding process. In most cases, a rush of
embarked on a business transformation program very low bids appeared at the end of the time period,
that included extending and refurbishing the store and the company got its materials for 20% less than
network and reinventing the company’s supply it had been accustomed to paying.
chain. It also involved outsourcing all of the company’s Do you have all the candidates on the table, not
IT with a view to immediate cost reductions of nearly just the dogs? Too often, companies consider only
20% and the “replatforming” of all existing IT systems the lame and the scruffy when thinking about which
to support the program. Two years into the program, units to dispose of. Instead, they should put all of
the group has announced the fourth consecutive their businesses up for consideration and subject
half-year of improved underlying profits. The annual them to a couple of tests.
IT operational savings have been fully realized, and If you didn’t already own this business, would you
the replatforming program remains firmly on track buy it at the current market price? If the answer is no,
and within budget. why are you still in the business?
No aspect of a company’s operations is more Is this business so essential to your other busi-
important than customer relations, a function so nesses that you can’t eliminate it without damage to
sensitive that organizations generally want to keep the bottom line?
it under their own watchful eyes. Nonetheless, in Like many other brewing companies, Canada’s
early 2002, AT&T Consumer turned to an outside Labatt owned an entertainment business—in this
partner to help transform its sales and customer care case, a baseball team, the Toronto Blue Jays. Labatt
unit, including telemarketing. and its partners bought the team for $7 million in
Their arrangement is an example of what’s 1976, in part because ball teams and ballparks are
known as co-sourcing, to distinguish it from more useful tools for selling beer. But in 2000, when the
conventional outsourcing. In this case, the partner value of baseball teams had soared into the hundreds
provides AT&T with technology to increase self- of millions of dollars, Labatt, which by then had merged
service, as well as innovative expertise in managing with Belgium’s Interbrew, decided that the time was
customer relationships. Unlike most outsourcing right to sell. So it sold its controlling interest in the Blue
arrangements, AT&T employees will continue to Jays to Rogers Communications for $112 million, a
perform key functions and will remain AT&T em- capital gain of 1,600%. Labatt retained a 20% interest in
ployees, while working alongside the partner’s staff the franchise, along with marketing rights, including
and management team to implement the technology pouring rights at the team’s home field and title
and process changes that will improve service and sponsorship of Blue Jays broadcasts.

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JOURNAL OF APPLIED CORPORATE FINANCE
 Too often, companies consider only the lame and the scruffy when thinking about
which units to dispose of. Instead, they should put all of their businesses up for
consideration and subject them to a couple of tests.

AT&T went through an agonizing reappraisal of services (through its Goldfish subsidiary) and road-
its wireless operations (along with its broadband, side assistance (through The Automobile Associa-
consumer, and business divisions). Despite the tion). By logging on to a single website—
initial conviction of many in the company that there house.co.uk—Centrica’s customers are able to con-
were essential synergies between AT&T Wireless nect with suppliers of household maintenance and
and the rest of AT&T, it turned out that Wireless was repair services and obtain a range of goods from
in fact separable. It was not significantly absorbed plumbing needs to less expensive mortgages.
into the company’s other operations, such as long This strategy has clearly succeeded. Centrica’s
distance and business services. Moreover, it turned profits rose from £175 million ($287 million) in 1997
out that customers didn’t always value getting all to £679 million ($987 million) in 2001. During the
their communications services—wireless and wired— same period, Centrica’s stock price outperformed
from one provider, as the company had assumed. the FTSE index by 183%.
While many have questioned AT&T’s overall If you do decide to get out of a business, what’s
strategy during the past several years, the company the best way to exit? There are a number of options
nonetheless made a tough and rational decision that a company should consider. Spinning off all or
when it decided to spin off its wireless division, part of the business as an IPO or selling all or part
which became a separate company in July 2001. of the business to someone else are the most
Both AT&T and AT&T Wireless retain some of the common approaches. Alternatively, a company can
strategic benefits they enjoyed when they were parts create a joint venture with a competitor, swap assets
of the same company, such as the marketing and with another industry player, or even find an uncon-
brand relationships. In addition, agents for each ventional buyer.
company refer customers to the other, and the two Consider the example of two giant pharmaceu-
companies share support services. tical companies, Novartis and AstraZeneca. Both are
Is it possible that the business you think of as leaders in research and boast a range of profitable
core is your least important? This is such a radical drugs. Although Novartis was eager to divest its
thought that it naturally meets a lot of resistance. But agribusiness and and AstraZeneca its agrochemical
a company’s greatest asset may not in fact be the division—each with the aim of concentrating on core
obvious one. Indeed, there may be a hidden asset businesses—they decided not to dispose of these
that could be the foundation on which a stronger units separately. Instead, the two companies agreed
business could be built. The evolution of Centrica in 1999 to spin their respective divisions off simul-
illustrates the point dramatically. In 1997, the vener- taneously into a single entity named Syngenta, which
able British Gas was split into two entities: BG, an would have the size and growth potential to attract
energy company, and Centrica, which retained the institutional investors, go public, and compete with
British Gas brand and the business of selling natural the likes of Monsanto.
gas to 67% of the homes in the United Kingdom. By 2001, Syngenta had established itself as the
Dominating the U.K. natural gas business has a world’s leading maker of agricultural pesticides and
couple of drawbacks, however. Keeping thousands antifungal products to protect crops and was the No.
of miles of pipeline, pumping stations, and other 3 producer of high-value seeds. The company re-
heavy metal facilities in order is enormously expen- corded sales of $6.3 billion that year and a net income
sive. What’s more, the business is mature, growing of $223 million. As the Syngenta experience illustrates,
no faster than its customers’ minimally increasing individual divisions may be worth more when they are
need for home heating and cooking fuel. spun off and recombined with other groups.
Centrica recognized that it had a valuable At the time of this writing (April 2003), and with
hidden asset, albeit one much softer than plants and the same goal of adding value, Siemens and Motorola
pipelines: the names, addresses, demographic pro- are considering an asset swap. Although Siemens is
files, and credit records of the millions of British a leader in telephony networks and switching, it is
households served by its pipelines. For the past five not as strong in the consumer side of the mobile
years, Centrica has built and acquired the capability telephone business. It has therefore proposed giving
to meet various other needs of these households. its handset manufacturing business to Motorola in
The company has concentrated on selling services exchange for access to Motorola’s valuable wireless
for which demand is booming, such as financial network infrastructure. The swap would boost

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VOLUME 15 NUMBER 3 SPRING 2003
 From the Executive Suite

In a study conducted with senior-level executives at 100 U.S. Fortune 1,000 companies, we found that
more than half of the companies surveyed have been active in divestment in the last 18 months.
Although there are a number of factors that lead companies to divest, their primary aim is to realize
some strategic objective, such as reducing debt or increasing market share.
Does your company engage in divestment? Have you sold any business units over the last 18 months?
Don’t know/no response 2% Don’t know/no response 2%
No 37% No 45%
Yes 62% Yes 53%

What are your primary reasons for conducting your current divestments? (Multiple responses were accepted.)
Raise cash to pay down debt 16%
The divested business unit is noncore 16%
The divested business unit detracts from bottom line performance 16%
Future shape of business portfolio 9%
We feel we can get a higher price for it as a seller 9%
Divested business unit is affecting market share price 6%
Other 50%

What is the most important success factor for your divestitures?

Don’t know/no response 3%
Speed of transaction 6%
Revenue generation 6%
To realize target (e.g., reduce debt, increase market share) 63%
Minimize disruption to remaining businesses 22%

Source: Accenture/Wirthlin Worldwide Survey.

Motorola’s share of the handset market to 25%, in the U.K. market in 2000. To avoid possible antitrust
second only to industry leader Nokia’s 37%. action, Interbrew had to divest its Carling brand. A
Divestiture that creates a joint venture is yet number of European rivals were eager to buy Carling
another possibility. Strategic assets can be spun off to strengthen their relative position in the English beer
from each partner to form a jointly owned company market, which was clearly worrisome from Interbrew’s
that is in a stronger, more competitive position. This perspective. So Interbrew sold Carling to Coors, a
is a particularly appealing approach in fast-paced power in the United States but a neophyte in Europe
industries that see constant technology innovations, and therefore less of a competitive threat.
because the joint venture gives management the Once a business unit is tagged for possible sale,
autonomy to make decisions quickly, move more there is a temptation to starve it of capital that is
nimbly, and pursue new ideas in a way that will not needed elsewhere, cut its marketing budget, reas-
put the core business at risk. sign its best managers to other divisions, and, in
general, to treat it like a poor relative. The problem
A CREATIVE CHOICE with such a strategy, of course, is that it is likely to
reduce the divestment candidate’s market value.
When a divestiture is forced upon the owner— Instead, the company should build up the unit the
when, for example, it is mandated for antitrust rea- way a private equity firm prepares a company for
sons—it pays to be creative in choosing a potential sale: invest capital to grow its market share, offer
buyer. It is often possible to get a good valuation management strong incentives tied to the right
without strengthening a competitor’s hand. Belgium’s metrics, and separate the business from other busi-
Interbrew, which owns Beck’s, Labatt, and Stella Artois, ness units. In short, continue to grow the business
among other beers, found itself in a difficult position and keep it strong for the short to medium term.

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JOURNAL OF APPLIED CORPORATE FINANCE
 Once a business unit is tagged for possible sale, there is a temptation to starve it of
capital that is needed elsewhere, cut its marketing budget, reassign its best managers
to other divisions, and, in general, to treat it like a poor relative. The problem
with such a strategy, of course, is that it is likely to reduce the
divestment candidate’s market value.

CONCLUDING REMARKS is necessary, it can take many forms. Wise companies

will avoid the knee-jerk reaction of disposing of the
For the next few years, many companies will “obvious” candidates before considering all the
give far more thought to divestitures than they did in possibilities.
the late 1990s. But disposing of a business unit is not In the end, divestiture need not be cause for
always the answer. Sometimes a troubled, costly gloom or an admission of defeat. Indeed, a
subsidiary can be restored to health with emerging carefully planned and well-executed restructur-
technology. Often, it is not an entire business that has ing that involves divestiture can be as significant
to be divested but simply one or more of its a victory for management and shareholders as a
functions. And when divestiture of an entire business successful acquisition.

PATRICIA ANSLINGER RAVI CHANMUGAM

is a New York-based partner and the global lead of the mergers is a senior manager in the mergers and acquisitions unit of
and acquisitions unit of Accenture’s Strategy & Business Architec- Accenture’s Strategy & Business Architecture service line. His
ture service line. Ms. Anslinger has advised on more than 150 M&A work focuses on M&A strategy, divestitures, strategic due
engagements of all sizes, involving friendly and leveraged buyouts, diligence, post-merger integration, and corporate strategy. Mr.
takeover defense, joint ventures, alliances, and divestitures. Her Chanmugam, who has eight years of experience in M&A and
most notable and recent work revolved around providing advisory management consulting, is based in New York and can be
services in the Compaq–Hewlett-Packard merger agreement. She reached at [email protected].
can be reached at [email protected].

JUSTIN JENK

is a partner in Accenture’s Strategy & Business Architecture

service line and heads the mergers and acquisitions/corporate
strategy unit in Europe. With nearly 20 years of experience in
management consulting, Mr. Jenk works with top management,
shareholders, and owners on all aspects of M&A, portfolio
restructuring, operational improvement, corporate finance, and
corporate strategy. He is based in London and can be reached
at [email protected].

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VOLUME 15 NUMBER 3 SPRING 2003
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