Breaking Up Is Hard to Do

But there are big rewards for firms that get it right.

DECIDING to sell a business unit or subsidiary can be one of the hardest decisions chief executives have to make. Some cannot bring themselves to wield the axe: big disposals are often triggered only when a new boss takes over or a financial crisis forces a chief executive’s hand. But a growing body of evidence suggests that smart sellers can earn impressive returns.

The number of such sales worldwide has been growing steadily, from 10,074 in 2003 to 12,361 last year, according to data from Thomson Reuters, a research firm (see chart). Over the same period the total value of such deals soared from $539 billion to almost $1.5 trillion, as the average deal size increased. In each of the past three years, several disposals have exceeded $10 billion in value.

This year is shaping up to be a busy one for divestitures too, even though the broader mergers-and-acquisitions market is in the doldrums. Slowing economies are forcing companies to take a hard look at their activities. Corporate activists are also pressing firms to shed underperforming assets. On July 10th General Electric (GE), which has been trying to find a buyer for its home-appliances division, said it plans to spin off its entire Consumer & Industrial division to shareholders. Other transactions in the pipeline include Time Warner’s planned disposal of its cable-television business, Allianz’s scheme to sell Dresdner Bank, and Royal Bank of Scotland’s proposed sale of its insurance arm. General Motors (GM) is looking for a buyer for its Hummer brand, and this week Merrill Lynch was reported to be planning to sell all or part of its 20% stake in Bloomberg, a financial-news provider.

Most sales take place in rich countries, but emerging-market firms have begun to join in. In December 2007 Orascom Construction Industries (OCI), an Egyptian conglomerate, sold its cement business to France’s Lafarge for €8.8 billion ($12.9 billion) in order to concentrate on its fast-growing construction, natural-gas and fertiliser activities (see article). In February the firm snapped up a rival fertiliser company using some of the money raised from the deal.

Economist breaking up

Although OCI sold its business outright, many emerging giants prefer spin-offs, which involve distributing shares in a subsidiary to the parent’s owners or selling a minority stake to new investors. Take Bharti Airtel, an Indian telecoms giant, which last year spun off a $1 billion minority stake in its network-infrastructure business, Bharti Infratel, to a group of investment funds. Such deals highlight hidden gems in a portfolio, but allow parent companies to retain control. They also attract investors keen to buy into fast-growing industries: in February Kohlberg Kravis Roberts, a private-equity firm, invested a further $250m in Bharti Infratel.

Like many private-equity firms, which frequently shuffle their portfolios, companies that buy and sell a lot tend to shine too. Carsten Stendevad of Citi, an investment bank, notes that between 2002 and 2007 the returns of firms that used a balanced mix of acquisitions and disposals outperformed acquisition-focused companies by almost 5% a year.


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