Reasons for Voluntary Divestitures

M&C Partners
6 min readOct 27, 2020

There are many types of corporate restructuring, one of which is divestiture. A voluntary divestiture is the selling of a part of the corporation. Buyers usually pay in cash, marketable securities, or a mix of the two.

Divestiture can also be voluntary or involuntary. Involuntary divestitures occur when a firm receives a negative review by the FTC. There are times when they require the company to divest itself of a certain division.

Meanwhile, companies may also undergo corporate restructuring through voluntary divestiture. Here are the top causes of voluntary divestitures.

Reasons for Voluntary Divestitures

Poor Strategic Fit of Division

Voluntary divestitures occur more often than involuntary divestitures. Different reasons drive these decisions. For instance, when the parent company wants to move out of a certain le of business since it doesn’t fit their strategic plans anymore.

This can take a lot of deciding if the line of business is doing good in terms of cash flow. But if the company does not align with the plans, a voluntary divestiture is a good option. This good performance can lead to significant divestiture proceeds that the company can invest in pursuing its overall goals.

Reverse Synergy

Synergy is one motive that is associated with M&As. Synergy is the additional gains that happen when two firms combine. When synergy exists, the joined element is worth more than the total of the parts esteemed independently. All in all, 2 + 2 = 5.

Meanwhile, reverse synergy means the parts are more efficient or worth more than they are within the corporate structure of the firm. In a mathematical sense, it’s 4–1= 5.

For example, an enormous parent organization can’t work a division productively, though a more modest firm, or even the division without anyone else, might work all the more productively and along these lines procure a higher return.

An example of reverse synergy was in the 1980s when a sell-off was forced unto Allegis Corporation and its previously acquired companies, including Hertz Rent A Car and the Weston and Hilton International hotel chains.

Allegis had followed through on a significant expense for these acquisitions dependent on the conviction that the synergistic advantages of joining the travel industry organizations with United Airlines, its fundamental asset, would more than legitimize the exorbitant costs.

At the point when the synergistic advantages neglected to appear, the stock value fell, making way for an unfriendly bid from the New York speculation firm Coniston Partners.

Coniston made an offer dependent on its analysis that the different parts of Allegis were worth more than the mixed entity

Poor Performance

Some companies prefer to divest divisions simply because they are not profitable enough. A nonprofitable unit might be weakening the exhibition of the overall firm. Such ineffectively performing divisions can be a money related drain on the overall firm.

The execution might be judged by an inability to pay a pace of return that surpasses the parent organization’s obstacle rate — the base return threshold that an organization will use to assess ventures or the presentation of parts of the overall company. A regular obstacle rate could be the firm’s expense of capital.

One example happened was when Procter & Gamble announced that it would initiate a program to sell off up to 100 of its brands in 2014. It left them with about only 70 to 80 brands.

The remaining ones make about 95% of the company’s profitability. The company had been feeling the squeeze from activist William Ackman, who battled that the Cincinnati-based company, established by William Procter and James Gamble in 1837, needed to reduce expenses and dispose of more vulnerable-performing brands.

The organization had been built up with worldwide consumer items colossus through both natural development just as noteworthy acquisitions, for example, 1957 securing of the Charmin Paper Mills. During the 1990s, it gained MaxFactor and Old Spice.

In 2001, it obtained Clairol from Bristol Myers Squibb, and in 2005, it gained Gillette. The issue the organization had is that it had such a large number of brands that didn’t produce budgetary outcomes in line with market expectations. Hence, the company needed to slim down and increase its focus.

Capital Market Forces

A voluntary divestiture may also occur to have better access to capital markets. The joined corporate structure may be harder for investors to categorize. Certain investors may be looking to put resources into steel organizations however not in pharmaceutical firms.

Different investors might want pharmaceutical firms but not steel companies. These two groups of investors may not need to put resources into a joined steel and pharmaceutical firm. However, each group may independently put resources into an independent steel or drug firm.

Voluntary divestitures may give more noteworthy admittance to capital markets for the two firms as isolated organizations than as a consolidated enterprise.

In the same way, divestitures may make companies where investors would like to invest but that do not exist in the marketplace. They call these firms pure plays.

Some think that there are an incomplete market and a demand for certain types of firms unmatched by market securities. The sale of these divisions of the parent company that becomes pure plays helps complete the market.

Market Liquidity for Corporate Assets

Another reason for voluntary divestiture is the market liquidity for corporate assets. An evident factor that must affect the likelihood that a firm may divest a unit is the strength of the demand for the unit. This sensibly would not be the essential factor as one would imagine that business strategy and money related execution would play a more conspicuous job.

Schlingemann, Stulz, and Walking, affirmed the function of the liquidity of the market for stripped assets. They were the ones who dissected an example of 168 divesting and 157 stopping firms over the period 1979–1994. They found that market liquidity clarifies which units of a business they should sell and which ones they should keep. Likewise, with a lot of M&A research, this is a common result.

Cash Flow Needs

An organization may auction a well-performing unit. This is in the event that it experiences tight budget needs, and if the unit isn’t fundamental to its corporate strategy. A sell-off may create the quick advantages of an imbuement of money from the deal.

Organizations that are under budgetary pressure are regularly compelled to sell off significant assets for upgrade incomes. Chrysler Corporation had to sell off its valued tank division in an exertion to fight off bankruptcy.

International Harvester (presently known as Navistar) sold its productive Solar Turbines International Division. They sold it to Caterpillar Tractor Company Inc. to understand the quick proceeds of $505 million. They used the funds to pay Harvester’s short-term debt.

Cash flow factors also drove Hertz’s sales by Ford in 2005 along with the sale by GM of 51% of GMAC in 2006. These divisions were profitable. And had good prices in the marketplace. Both companies used the cash to offset sizable operating losses

Abandoning the Core Business

The offer of an organization’s core business is a more uncommon purpose behind a sell-off. A model of the offer of a core business was the 1987 deal by Greyhound of its transport business.

The offer of a core business is regularly persuaded by the board’s longing to leave a zone that it accepts has developed and presents barely any development opportunities. The firm has effectively expanded into other more productive territories. And the offer of the core business may help account for the development of these more gainful exercises.

Another example of this was Boise Cascade’s choice. It was his choice to sell off its paper fabricating business and become an office items retailer. This was through its earlier acquisition, OfficeMax.

Boise Cascade obtained OfficeMax in 2003 for $1.15 billion. The company obtained it as a component of a vertical integration strategy. But after some time the paper creation business became less marketable while the retail distribution business became appealing. Boise Cascade sold off its paper division to an investment firm in 2008. But its parent, Packaging Corporation of America (PCA) required its paper and packaging assets in 2013.

© Image credits to Miguel Á. Padriñán