Date: 2016-08-12

Divestitures: The Key to Growth is not Growing

Taylor Hill

Some may think that the key to expansion is growing, but it is becoming more popular in the global business world today for companies to divest in order to achieve desired growth. Many CEO's are saying that divestitures are the key to unlocking hidden potential and value within a company and also help improve corporate performance. A growing abundance of divestitures is being seen throughout industries around the globe, even in industries where M&A activity like this is anything but the norm.

There are specific drivers in different industries that are causing a greater number of divestments for companies. In a study done by EY, a global public accounting firm, a few of the sector drivers included are revealed. For consumer products, it is attractive for companies to drop underperforming brands. In the financial services industry, growing capital requirements and stricter regulations are making divestments seem realistic. In oil and gas, the weak competitive position in the world market is driving such business activities.

So how would a company know what to look for to determine if the divestiture was a success? There are three key points that indicate a divestments success: a positive impact on the valuation multiple of the remaining company, a sales price above expectation, and closing ahead of timing expectations. For more guidance on making a successful divestment, EY provides a more in depth look into specific industries and the leading practices.

This business practice of shrinking in hopes of fostering growth has taken a front seat in many global companies. Maybe this is because divestitures have a proven record of positive growth when compared to mergers or acquisitions. The growth in divestitures will have a rebound effect causing a worldwide demand for consulting firms that can assist in such transactions, and will also change the face of many international companies in the near future.

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