Divesting of corporate divisions is commonplace in today’s business world, but the drivers of such pursuits and the methods can vary from transaction to transaction. A quick scan of the headlines of any finance-oriented web site and announcements of mergers, acquisitions or sales can be viewed on a mostly daily basis. But each company likely weighed numerous factors before this public notification.
To start, companies must first make the decision to divest an identified division. The division was likely selected based on its recent performance, which could be either under or over par. A thriving division may find itself on the block since it would generate more interest and a higher payday, an approach that can be employed by a firm that may need to pay down debt or streamline its balance sheet. Weak results may prompt a company to refocus on core competencies and cash out the under-performing group, using the proceeds to fund growth initiatives within its skill set.
In the case of Unisys (UIS), a computer services and information technology solutions provider, that undertook a multi-year strategic transformation, assets classified as non-core found themselves on the sale rack. One such deal shed the company’s Health Management business to Molina Healthcare (MOH) for $135 million in cash. This transaction was just one of many Unisys completed in order to revitalize its core lineup of service offerings and stem its declining top line. The straight sale is one of the easier divestiture methods to undertake, since cash is exchanged for the operating division.
However, sometimes a more complex solution is utilized as was the situation in the Kraft (KFT) spin-off from Altria Group (MO). Potential litigation related to tobacco-related health issues and a decline in growth of domestic operations of its traditional products, as well as the desire to keep shareholders happy, likely spurred Altria to this type of divestiture. Altria distributed about 89% of Kraft stock to shareholders, at a rate of approximately 0.69 Kraft share for every Altria share. Plus, shielding the growing Kraft division from unknown liabilities that may arise due to tobacco lawsuits down the road allowed the division to better deploy cash for expansionary ventures, both geographically and through brand augmentation.
Bristol-Meyers Squibb Company (BMY) took a different approach to the spin-off of its nutritional unit, Mead Johnson Nutrition Company (MJN). The company offered current BMY shareholders the opportunity to exchange one BMY share for 0.6313 MJN share. Unlike the Kraft spin-off where Altria shareholders received KFT stock in addition to maintaining their MO holdings, BMY owners had to choose. Investors could not have both stocks unless they traded a portion of their BMY holdings in return for MJN shares.
In some instances, a company may decide to cease operations in a division without an imminent sale pending, probably owing to significant losses being incurred and the lack of buyer prospects. American Eagle Outfitters (AEO) employed this tactic when shuttering its MARTIN+OSA brand. The division had not yet become profitable and after a disappointing holiday season, American Eagle pulled the plug on the unit. Liquidation of assets is the next probable step, with the valuable parts broken off in pieces to be retained by the company or sold off to a bargain hunter. This would not be an ideal way to generate funds when offloading a division, but may prove necessary in dire financial circumstances or when no one is willing to the buy the entire entity being shuttered .
In all types of divestitures, other issues can arise regarding the splitting off of a division. Information technology systems and networks present a challenge, in addition to separation efforts for back office support services and facilities that house more than one division. Too, ongoing support from the parent may be necessary after the separation in order to assure a continuity of business operations. Case in point, the spinoff of auto parts maker, Visteon , by parent company Ford Motors (F). These two entities remained entangled for years after the initial spinoff, since a majority of Visteon’s revenues were dependent upon Ford. Labor agreements further enmeshed the two. Five years later, Ford was still taking care of its former units, this time to help Visteon avoid bankruptcy. Plants were transferred back to Ford, in addition to offices and other facilities, but, nonetheless, these efforts were not enough to save Visteon, and the company filed for bankruptcy protection.
No matter the method, divestitures are a frequent part of the business landscape. Whether a sale, a spin-off, or liquidation, the outcome is similar, to rid the parent company of a particular division. With any bit of luck, the divesting method will bring the highest possible price and make for a smooth and seamless transition.