Divestment Strategy

Divestment Strategy

Finding framework to target divestment

BCG model can be used to find the unit for divestment strategy. Products and business operations identified as ‘Dogs’ in the BCG matrix are prime candidates for divestment.

Reasons for Divestment

1) Market share is too small (to remain competitive or to give adequate returns)

2) Availability of better alternatives (Resources can be diverted from marginally profitable to zones of greater rate of return)

3) Demand for current product has decreased drastically

4) Need for increased investment (For continued sustenance, company may require large investment in advertising, R&D, equipment etc.)

5) Lack of Strategic fit (Acquired business is not consistent with the image and strategies of the firm)

6) Legal pressure to divest (to avoid market monopoly by single player)

How to Divest

1) By allowing its business arm (to be divested) operate as an independent entity.

2) By selling portion of the business to another organization.

3) Simply close a portion of Firm’s operation.

Difficulties in Divesting

1) Finding buyer on time

2) Price at which negotiation for divestment is done

3) Management may want to wait to see the product’s performance in near future

4) Management’s ego issue / fear of tarnishing of public image may delay the process

Source:

http://www.referenceforbusiness.com/management/De-Ele/Divestment.html

Link for Strategy:

http://www.12manage.com/i_s.html

ICI – Britain Imperial Chemical Industries

ICI decided to demerge into 2 separate firms: Zeneca and new ICI. This happened because of huge mismatch between its corporate strategy and needs of its individual businesses.

1^st Divestment – The PVC division (core product internally developed by ICI) swap with British petroleum in 1982.

Why ICI chose to Demerge

1) ICI business could be grouped into 2 technological clusters, which required its own style of parenting, which old ICI was not equipped to provide. It is this prime reality (not lack of synergy from its business) that lies behind ICI demerger.

2) The older businesses in the portfolio prevented the share prices from reflecting the growing profitability of pharmaceuticals.

a. Pharmaceuticals profitability:

b. They had their own sales and distribution in most countries and were not connected with ICI

c. Rise of biotechnology in 1980 distanced ICI’s pharmaceuticals from traditional chemical operations

3) Stringent environmental controls in early 1980’s squeezed the profits and pave way for possible demerger.

4) ICI had too much administrative overheads at 3 levels (Corporate headquarters, product division, territorial companies outside UK) and were under pressure to cut back the number of executive directors, senior managers at head office to simplify control procedures.

5) Performance of separate divisions –

a. Zeneca biosciences – Able to sell highly differentiated products for which customers were ready to pay high price.

b. Chemical companies – It could sell less differentiated products in high volume in lower prices.

Whether ICI could have avoided Demerger

1) Too ambitious and over-diversified: Being dominant producer in home market, ICI expanded overseas since domestic market was saturated.

a. To avoid demerger, the focus should have been less on size and global scale and more on internal linkages and synergies and on shareholder’s needs, which were overlooked in 60’s and 70’s.

2) Threat of takeover: ICI demerger pre-empted the possible bid by Hanson industries (2.8% stake in ICI in May 1991) to take over ICI. The threat of takeover forced ICI to split itself into smaller, leaner, more competitive companies (in order to increase share price and avoid takeover from Hanson).

3) Focus on Internal & neglecting external conditions: ICI kept overlooking the external conditions like fast growing and developing technologies and changing market & competition tendencies. A more open, aware corporate policy could have weakened the call for break-up.