Framework library · M&A and corporate strategy
Divestiture strategy
A divestiture review asks of each business whether this company is still its best owner. The test is parenting advantage: a parent should own a business only if it adds more value to it than any other owner could. A business that performs well can still be worth more in other hands, and the sale price is how that difference is shared between seller and buyer.
Use it when
- You run several businesses and want a regular, consistent test of which ones you should still own.
- A buyer has approached you about one business and you need to know whether to engage.
- Capital is short, and selling a business another owner values more is cheaper than raising money.
- A business is doing well but needs investment or capabilities the group does not have.
Avoid it when
- There is only one business. The question is then restructuring, or a sale of the whole company, not a portfolio choice.
- You have decided to separate a business and need to choose the route: a sale, a spin-off, a listing or a joint venture. Use spin-off analysis.
- You need the price. The scoring shows whether a better owner is likely to exist. Value the business with a DCF valuation and test the market.
How to run it
List the businesses as a buyer would see them
Units with their own customers, assets and results that could be sold on their own, not the internal organisation chart.
Score fit and parenting advantage
Fit is how much the business shares customers, assets or capabilities with the rest of the group. Parenting advantage is what the group adds that no other owner could.
Score performance and value to a better owner
Performance against the cost of capital and peers. Value to a better owner is how much more a specialist, a rival or an infrastructure investor would pay than the business is worth to you.
Score separation complexity
How entangled the business is with shared networks, systems and contracts. A deeply entangled business costs time and money to sell, which strengthens the case for keeping it.
Rank and test the bottom of the list
Businesses below the threshold are candidates to sell. Before deciding, check the dis-synergies: what the rest of the group would lose if they went.
Decide and set the timing
Sell while a better owner will still pay for the difference, not after the business has declined. Waiting usually costs value.
Work through it
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Mistakes to avoid
- Reviewing only the poor performers. A strong business that another owner would run better is often the most valuable sale.
- Treating shared overhead as a reason to keep a business. Stranded costs are a cost of the sale to be planned and removed, not a reason against it.
- Scoring fit by history or loyalty rather than by what the business actually shares with the rest of the group today.
- Waiting for a business to recover before selling it, by which time buyers have priced in the decline.
Where it comes from
Andrew Campbell, Michael Goold and Marcus Alexander set out the test of parenting advantage, that a company should own a business only if it creates more value in it than rival owners could ("Corporate Strategy: The Quest for Parenting Advantage", Harvard Business Review, March to April 1995). Lee Dranikoff, Tim Koller and Antoon Schneider argued that companies sell businesses too late and at too low a price because they rarely review them systematically ("Divestiture: Strategy's Missing Link", Harvard Business Review, May 2002). Source.
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