847.849.2800
Contact
For decades, business strategy has been synonymous with growth through mergers and acquisitions. But according to Emilie Feldman, Professor of Management at Wharton and author of Divestitures: Creating Value Through Strategy, Structure, and Implementation, companies that focus on M&A deals are overlooking one of the most powerful tools in their arsenal: a clear, proactive divestiture strategy.
In a recent conversation, Feldman unpacked why smart divestiture planning often outperforms M&A in value creation and why boards and executives looking to shore up their balance sheet should rethink their approach to shedding non-core assets.
The Overlooked Power of Divestitures
Feldman’s interest in divestitures began in grad school. While M&A attracted a flood of academic attention, divestitures remained largely in the shadows.
Feldman quickly realized that “companies tend to generate more value from divestitures” than they do from acquisitions, especially when done proactively.
Yet most companies still don’t prioritize a formal divestment strategy for underperforming assets. Only 30% of S&P 500 firms engage in the divestiture process in a given year, despite mounting evidence that these moves can unlock significant shareholder value.
The Stigma Around Letting Go
Why are so many firms reluctant to divest? Feldman believes it’s partly psychological. The language around M&A is always positive — “synergy, opportunity, growth, expansion, profit, all of these great words. And the divestiture words are quite negative: failing, retrench, lagging. That creates a stigma,” she says.
This misperception often leads companies to avoid divesting parts of the business even when it’s clearly the right strategic move.
Feldman describes two types of divestitures:
- Reactive: Triggered by failure, declining industries, or bad acquisitions.
- Proactive: Done to sharpen strategic focus, even when the divested business asset is profitable.
“The market often conflates the two,” Feldman notes. “Even a smart, proactive spin-off gets treated as a reaction to failure. That’s where boards need to reframe the narrative.”
Why Divestiture Strategy Is Smart
For Feldman, divestiture is not just a response mechanism — it’s a strategic discipline.
To divest well, you need to know what your core business is. An ongoing divestiture strategy forces executives to take the trouble to “see where the fits and the misfits are.”
Boards, in particular, should drive this level of portfolio clarity. Yet research shows that full business portfolio reviews happen only once every five years at many companies. How can you know what’s core — or better off divested, Feldman wonders, if you’re not reviewing your business mix regularly?
Her solution: Boards should apply what she calls the “better-off test.” For every business unit, ask: How is owning this business making us better off as a company?
If you can’t answer that question clearly, you need a corporate strategy that includes divesting.
Structuring a Divestiture: Sales vs. Spin-Offs
Understanding divestiture structure is critical to execution. According to Feldman, 90% of corporate divestitures are a straight asset sell-off, most likely to a strategic buyer or private equity.
Another 5% of divested assets become spin-offs — new standalone public companies distributed to existing shareholders.
Each structure has tradeoffs:
- Sales can be fast and create immediate cash, but may trigger tax consequences.
- Spin-offs that create separate entities can be tax-free and retain shareholder value, but a successful divestiture requires complex due diligence, valuation, and public-market readiness.
Sales to strategic buyers often generate higher premiums—about 60% more than financial buyers, thanks to synergy opportunities. Regardless of structure, Feldman argues that a divestiture is only as successful as its strategy and implementation.
Implementation: Beyond Separation
Many executives underestimate the complexity of post-divestiture integration, especially for the remaining parent company that wants to refocus on core competencies.
Feldman describes implementation as a “telescoping” process with two views:
- Inward: Unwinding interdependent operations, restructuring, and eliminating stranded costs.
- Outward: Rebranding, resetting stakeholder expectations, and communicating the new strategy clearly to the market.
“You’re not just separating businesses. You’re reconfiguring your entire organization,” she said. “Divestiture success requires planning for both sides of that equation.”
Divestitures Done Right
Some of Feldman’s favorite divestiture examples include:
- GE’s breakup into three focused companies (healthcare, aviation, energy)
- United Technologies’ separation of unrelated business lines
- Kellogg’s spin-off of its North American cereal unit
- Unilever’s planned ice cream carve-out, exposing diseconomies of scale
- Coca-Cola’s sale of Odwalla, shedding a misaligned fresh-juice business
In each case, the divesting company sharpened focus and improved long-term strategic fit—a clear hallmark of a winning divestiture strategy.
Final Thought: Strategy First
What’s Feldman’s #1 takeaway for boards and business leaders?
“Understand your core. Really understand it.“ And have the courage to sell, spin-off, split-off, liquidate, or otherwise get rid of anything that no longer fits.
She’s not anti-M&A, but she’s adamant that divesting assets that have become liabilities deserves equal consideration as a tool that leads to greater profitability.
Companies that ignore divestitures may be clinging to nostalgia, legacy, or inertia. But those that embrace a disciplined divestiture strategy can unlock value, strengthen operations, and build a more resilient future.
Read More:
- How To Do a Reverse Merger Into a Public Shell Company in 9 Not So Easy Steps. Or SPAC in 10!
- Interim Executive Recruitment: Making the Right Match
- M&A IT: The Overlooked Key to Deal Success
____
Do you need help developing and implementing a divestiture strategy? A rock-star interim or fractional executive with extensive experience doing just that is the answer! Reach out to us for a confidential conversation about how a RED Tea executive can get your organization on track.
