We've seen what divestiture is.
We've also seen how to divest particularly spin-offs and sell-offs.
Now, we're going to look at when to divest.
Let's say our firm is active in businesses A and B.
And that we want to consider divesting business B.
Then we should be comparing the current situation,
A and B, with the new situation, only B.
What does that look like?
The current situation is the value of being in both businesses,
here indicated by the value of A and B.
The new situation is just the value of business A,
here indicated by V of A.
Of course, you would also hope to get something in return when divesting business B,
and that's here indicated by D of B,
the divestment of B,
which is the value from divesting that business.
If you do a sell-off,
that is sell your business to another company,
then this would be the price for which that company pays for your business, B.
If you do a spin-off, that is,
the shares of the divestment business are distributed to the shareholders,
then it's the value of business B as an independent divested business.
For precision, here's a definition.
It's not important to remember the notation.
I do, however, want you to remember the basic trade-offs.
We're comparing before with after.
Before, we have the value of businesses A and B together.
For the after situation,
businesses A and B are no longer valued jointly but separately.
The value of A is here indicated by V of A.
The value of B is indicated by the divested value the D of B.
And notice a little m,
that means the value of the divestment for B depends on the divestiture mode.
From this notation, we can derive the basic conditions for when we
should divest versus when we should not divest.
The first condition, we recognize synergies.
Synergies means that the value of businesses A and B is
greater if jointly operated rather than separately operated.
If we think there are synergies,
then that would be an argument for keeping these businesses together.
However, if we believe there are no synergies,
then that would be an argument for the businesses to be separate,
that is to divest a business.
This first condition has to do with the V of A and B.
The other condition is called better parent.
This means that another owner can pay more for
business B than what that business is worth to you.
For example, this might happen if another company has
even stronger synergies with business B than you do.
If there's a better parent,
than this by itself would be a reason for divesting business B.
Note that this can happen even if business B is
doing well and even if we have synergies with our business B.
This condition has to do with the D of B.
From these conditions, we can derive clear implications not only for went to divest,
but also for the best divestiture mode.
Let's start with the situations when there's no synergies and no better parent.
There's no reason to keep the business and at the same time,
it's unclear whom we would sell the business to.
So we can go for a spin-off, that is,
we can make the business independent and
distribute its shares among the original shareholders.
Let's move to the opposite situation
when there are synergies and there is a better parent.
We will be happy to hold on to the business
because the business has synergies with our other businesses,
yet there's another company that can create even more value from that business.
In that case, we can go for a sell-off,
that is, we sell the business to another company.
Let's move to the third situation,
no synergies and a better parent.
Because there are no synergies,
we can divest the business, a sell-off,
that is, selling to another company is a natural option.
In some circumstances, however,
a spin-off could be preferred on financial grounds.
This has to do with the price the other company is willing to pay,
tax considerations, and the fee you would have to pay the advisers of the transaction.
For us, what's important is that in this situation,
you would consider a divestiture.
Then the last situation,
synergies and no better parent.
This means there's value from jointly operating
this business and no one can do better than us.
However, as we've seen last week,
the existence of synergies does not necessarily mean we should have full ownership.
We discussed the trade-offs between alliances and acquisitions in terms of the benefits,
and costs of equity.
Here, the discussion is a similar one.
We currently have full ownership,
as in an acquisition, but perhaps,
more value can be realized if the business has some independence,
as in an equity carved out,
or in full independence,
as in a spin-off.
You can use the ally or acquire framework that we saw
last week to think through the optimal level of equity.
We've looked at when to divest.
I like to make two further points.
First, we've seen that even if there are synergies,
you may want to divest if there is a better parent out there.
That means that for us as corporate strategist,
we want to actively consider our portfolio.
We want to actively consider which businesses should be in
our portfolio and which businesses should not be in our portfolio,
even if those businesses are doing well.
The second point is that,
you may have noticed parallels between what we saw last week,
diversification, and this week, divestiture.
And the reason is that one is the opposite of the other.
So we can we use a lot of the material that we covered last week,
diversification, for this week, divestiture.
Bart VannesteAssociate Professor
