Corporate Strategy
Fall 2008
Session 13
Divestures and Restructuring
Dr. Olivier Furrer
Office: TvA 1-1-11, Phone: 361 30 79
e-mail: o.furrer@fm.ru.nl
Office Hours: only by appointment
Session 13 © Furrer 2002-2008
1
Need for Restructuring
Session 13 © Furrer 2002-2008
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Number of Divestitures, 1965-2000
Session 13 © Furrer 2002-2008
3
Restructuring and Divestment
• Why restructure or divest?
– Pull-back from overdiversification.
– Attacks by competitors on core
businesses.
– Diminished strategic advantages of
vertical integration and diversification.
• Exit strategies
– Divestment– spinoffs of profitable SBUs to investors;
management buy outs (MBOs).
– Harvest– halting investment, maximizing cash flow.
– Liquidation– Cease operations, write off assets.
Session 13 © Furrer 2002-2008
4
Reasons for Divestitures
•
•
•
•
•
•
•
•
Reason
Nb. of Divestitures
Change of focus or corporate strategy
43
Unit unprofitable or mistake
22
Sale to finance acquisition or
leveraged restructuring
29
Antitrust
2
Need cash
3
To defend against takeover
1
Good price
3
Total
103
Session 13 © Furrer 2002-2008
Source: Kaplan and Weisbach, 1992
5
U.S. Mergers and Acquisitions
versus Divestitures, 1965-2000
Source: Mergerstat Review, 1994-1998, 2001.
Session 13 © Furrer 2002-2008
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Strategies in Declining Industries
Intensity of Competition in
Declining Industry
High
Divest
Quickly
Niche
or Harvest
Harvest
or Divest
Leadership
or Niche
Leadership: Seek a leadership
position in terms of market
share.
Niche: Create or defend a
strong position in a particular
segment.
Harvest: Manage a controlled
disinvestment, taking
advantage of strengths.
Divest Quickly: Liquidate the
investment as early in the
decline as possible.
Low
Few strengths
Session 13 © Furrer 2002-2008
Many strengths
Company Strengths Relative to
Remaining Pockets of Demand
Source: adapted from Porter (1980)
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Turnaround Strategy
• The causes of corporate decline
–
–
–
–
–
–
–
Poor management– incompetence, neglect
Overexpansion– empire-building CEO’s
Inadequate financial controls– no profit responsibility
High costs– low labor productivity
New competition– powerful emerging competitors
Unforeseen demand shifts– major market changes
Organizational inertia– slow to respond to new
competitive conditions
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The Main Steps of Turnaround
• Changing the leadership
– Replace entrenched management with new managers.
• Redefining strategic focus
– Evaluate and reconstitute the organization’s strategy.
• Asset sales and closures
– Divest unwanted assets for investment resources.
• Improving profitability
– Reduce costs, tighten finance and performance controls.
• Acquisitions
– Make acquisitions of skills and competencies to strengthen
core businesses.
Session 13 © Furrer 2002-2008
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Types of Restructuring
• Portfolio Restructuring
– Portfolio restructuring involves significant change in the
firm’s configuration of lines of business through acquisition
and divesture transactions.
• Financial Restructuring
– MBO and LBO. The assumption is that a large amount of
dept will force managers to focus on their core businesses,
and not squander cash flows from the core businesses in less
rewarding diversification projects.
• Organizational Restructuring
– Traditionally, organizational restructuring has been shown to
be ineffective because it is disruptive and may destroy
competencies
Session 13 © Furrer 2002-2008
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Restructuring Managerial Incentives
• Corporate Executives’ Compensation
• To prevent overdiversification
• Divisional Executives’ Compensation
• To attract and retain talents
• To encourage cooperation or competition
• To balance short-term and long-term objectives
• To control risk-taking behaviors
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Restructuring Managerial Incentives
(Cont’d)
• Headquarters managers of the parent company may
want to change the incentive structure to encourage
different behaviors among divisions.
• For example, executive in an entrepreneurial division
needing growth may receive low salaries and limited
short-term earnings incentives but significant
“phantom” stock options in order to create more risk
taking.
• A division at a later growth stage may emphasize salary
and short-term bonus and play down stock options.
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Restructuring Managerial Incentives
(Managerial Implications)
• Many executive compensation plans provide incentives (perhaps unintended) for
corporate managers to diversify their firms and thereby to increase the firms’
size. Thus, corporate incentive compensation should emphasize firm performance
over which managers have some control, regardless of firm size or diversity.
• Incentive based on annual ROI may enhance short-term performance but reduce
divisional managers risk taking.
• Long-term incentives alone are not adequate. To be most effective, they should be
combined with other forms of restructuring, particularly downscoping.
• Long-term incentives also have trade-offs, for example, long-term incentives
based on divisional performance may reduce cooperation among related
divisions.
• To be meaningful to executives, incentives should be linked to a level and a type
of performance that board members can link to managerial action. They should
also be based on challenging but achievable targets.
Session 13 © Furrer 2002-2008
Hoskisson and Hitt, 1994
13
Downsizing
Risk of lost of human capital
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Restructuring Activities
Downsizing
Wholesale reduction of employees
Downscoping
Selectively divesting or closing non-core businesses
Leveraged Buyouts (LBO)
Financial restructuring in align managers’ focus
and shareholders’ interest
Session 13 © Furrer 2002-2008
Ref.: Hoskisson and Hitt, 1994; Hitt, Hoskissson and Ireland, 2007
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Downsizing
•
Downsizing is a reduction in the number of a firm’s employees and,
sometimes, in the number of its operating units, but it, may or may
not change the composition of businesses in the company’s portfolio.
Thus, downsizing is an intentional proactive management strategy,
whereas “decline is an environmental or organizational phenomenon
that occurs involuntarily and results in erosion of an organizational
resource base” (McKinley, Zhao, and Rust, 2000).
•
In 2005, GM signaled that is will lay off 25’000 people through
2008 due to poor competitive performance, especially as a result of
the improved performance of foreign competitors (Wall Street
Journal, 2005).
Session 13 © Furrer 2002-2008
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Downscoping
•
Downscoping refers to divestiture, spin-off, or some other means of
eliminating businesses that are unrelated to a firm’s core businesses.
Commonly, downscoping is described as a set of actions that causes
a firm to strategically refocus on its core businesses (Danikoff,
Koller, and Schneider, 2002).
•
In 2005, Sara Lee Corporation has decided to spin off its apparel
business in a “massive restructuring that will shed operations with
annual revenues of $8.2 bio.” It will try “to focus on its strongest
brands in bakery, meat and household products.” The restructuring
will trim revenues that used to account for 40% of sales. The
company plans to use some of the savings to R&D new products in
its top selling brands (Wall Street Journal, 2005).
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Leveraged Buyouts
• Purchase involving mostly borrowed funds
• Generally occurs in mature industries where R&D and
innovation are not central to value creation
• High debt load commits cash-flows to repay debt,
creating strong discipline for management
• Increases concentration of ownership
• Focuses attention of management on shareholder value
• Greater oversight by “active investor” board members
• Leads to more value-based decision making
Session 13 © Furrer 2002-2008
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Restructuring and Outcomes
Alternatives
Downsizing
Short-Term
Outcomes
Long-Term
Outcomes
Reduced
Labor Costs
Loss of
Human Capital
Reduced Debt
Costs
Lower
Performance
Emphasis on
Strategic Controls
Higher
Performance
High Debt
Costs
Higher Risk
Downscoping
Leveraged
Buyout
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