This article originally appeared on Bangkok Post.
There are many reasons why executives shy away from divestment of non-core businesses. They're reluctant to shed revenue, they fear the market's reaction to a smaller company, and they don't want the challenge of stranded costs. They reason that the business could improve in time, or they have trouble accepting the fact that it could perform better in another's hands.
But it's OK to divest. When strategically selected to clean up a company's portfolio and designed to command an optimal price, divestitures can generate significant shareholder value. They can also create a catalysing event for improving the remaining business. When done well, they reduce complexity and provide fuel for the company to pump back into its core.
As part of our ongoing work with divestitures, Bain & Company studied more than 2,100 public companies and found that those engaging in focused divestment outperformed inactive companies by about 15% over a 10-year period, as measured by total shareholder return.
The results are even better for companies that combine focused divestments with a repeatable M&A model. They outperform inactive companies by nearly 40% over a 10-year period and generate more than twice the sales and profit growth.
Among the 137 largest divestitures in the study, companies that divested to focus on their core saw their market cap rise by 7.9% within three months of the announcement. This compares with 1.4% for companies that divest with the primary stated aim of raising cash to pay back debt.
Jim Wininger is a partner in Bain's Atlanta office and a leader of Bain's M&A practice. Derek Keswakaroon is a partner in Bangkok.