
The power of portfolio renewal and the value in divestitures
Companies that proactively review their portfolio and consider and complete divestitures via timely decision-making are more likely to create value.
Faced with an enigmatic short-term economic outlook, companies are preparing for a potential wave of dealmaking with an innovative tactic: reorganizing business units to create a company within a company to be prepared to quickly create deal value and strike while the iron is hot.
We are seeing an uptick in internal reorganization initiatives such as consumer companies becoming more category-focused, pharmaceutical companies separating business units to position for global opportunities, and media companies aligning their B2C and B2B businesses with marketplace dynamics.
The ability to operate independently while still under the parent company’s umbrella boosts the opportunity for value creation by increasing speed to market — when the time is right — and improving the chances of regulatory approval.
The approach allows executives to prepare for a potential divestiture by preemptively disentangling knotty legal structures and core operations, while leaving in place key shared services like finance, IT and HR. In baseball terms, it would be a bit like dealmakers putting the business unit in the on-deck circle for a divestiture but waiting until the economy stabilizes to get in the batter's box, while also giving the business unit the attention it needs to thrive.
This strategy can create optionality for companies. If the company has an immediate need for capital, this tactic can make it easier to launch a joint venture (JV), liquidate the equity or leverage it in debt financing.
Successfully transforming the business to operate as a company within a company starts with establishing a clear set of objectives and the guiding principles needed to accomplish them. The business will then need to be reorganized to enable each standalone business to operate under a distinct legal structure, establishing arms-length agreements to govern the future relationship between the businesses.
Each standalone business should be financially separated so that it can measure its own financial performance and key metrics. There is no one-size-fits-all approach; the extent of the changes will need to be tailored to meet each company's objectives. The primary goal in this type of reorganization is to enable a capital markets transaction (vs. cost-cutting and/or headcount reductions), so internal messaging will need to be carefully managed, along with an appropriate change management program to align employees with the strategy.
Restructurings are often considered a reaction to company distress. But leveraging this reorganization strategy as a proactive tool to transform your business to meet the market with agility can help create long-term value, unlock opportunities and provide access to capital more quickly.
Here are some considerations we recommend to leaders that are evaluating proactive alternatives:
Preparing your company can set the runway for each of these options:
Timely consideration and planning can be the key to recognizing valuable opportunities. Considering that the acquisition-to-divestiture ratio is at a 20-year high, businesses who take meaningful steps now will likely be more prepared as the market shifts.
In our latest deals outlook, we noted five drivers in dealmaking:
Changing regulatory, supply chain and market factors are leading to uncertainty for dealmakers. While some companies have a clear path to deals, others need to stay agile in the current market.
Companies that proactively review their portfolio and consider and complete divestitures via timely decision-making are more likely to create value.
The uneven US M&A recovery will likely accelerate in 2025 as dealmakers digest the implications of a new regulatory regime.
Having a process to determine whether your business can benefit from strategic acquisitions, joint ventures, spinoffs and divestitures is a key to success.