{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
How boards can help add value through divestitures
August 2023
Creating long-term value
Strategic leaders recognize that divestitures can be an important source of value creation by shifting precious time and resources from non-core operations to businesses that are a better fit. Selling a non-core asset can also allow companies to allocate capital generated by the sale to stronger core businesses — which helps create shareholder value.
That’s particularly important in today’s environment where, with inflation and interest rates, the cost of capital is higher than it's been in a generation.
PwC’s recent study, The power of portfolio renewal and the value in divestitures, found that directors have an important role to play in the portfolio review part of the divestiture process. Here’s how.
Does it pass the sniff test? Ask for more frequent reporting
Rigorous board oversight is the hallmark of good governance. And when it comes to selling a non-core asset, your board needs transparency — and information from management — to get the job done and manage corporate value.
Speed is a crucial component in the decision-making process. Some of your business units may be ripe for sale now, and waiting until they’re long past their expiration date can erode value. Your board plays an important role in setting the tone. It should encourage management to be proactive and understand that the faster a company recognizes a divestible asset, the better chance of possible value creation.
Changing market dynamics, like economic and geopolitical stress, can complicate your board’s assessments. Boards can improve by asking more relevant questions and challenging management. That means drilling down not just around management’s choices but also on alternatives — including asking for justification on why a particular course of action was chosen.
To help make informed decisions, board members need transparency and timely reporting from management. Annual reports should be a given, but increasing the frequency of financial and risk reporting to quarterly can help move decision-making along.
Second time around: Board experience can help with context
During the years of the extended bull market of the 2010s, capital was inexpensive and readily available. Since most board members have lived through periods of high interest rates and inflation, they probably have a better understanding of what might lie ahead. They know that near-zero interest rates haven’t always been a thing.
Your management team can benefit from that experience and, as capital constraints continue in a retreating market, board experience can help temper risk aversion. Board members can provide the context to guide management on growth through capital reallocation, including carefully planned divestitures.
Navigate capital in a different environment
While interest rates have ticked up, they aren’t prohibitive. In reality, capital is still accessible and deals are still getting done, just not at the levels seen in 2021. Some companies on the sidelines probably should be more involved since M&A or divestiture activity can support long-term growth goals. But the change in credit markets after such a long period of easy money may cause companies to develop risk aversion prematurely.
Seasoned board members know capital could get much more expensive. With interest rates of the 1980s and 1990s in mind, your directors can provide valuable insights to help you evaluate deals activity in an evolving environment.
Bring a value mindset to portfolio review
Emotions can play a key role in slowing down divestiture decisions. Management may be more concerned about the perception that selling is an admission of failure than they are about a deal’s value creation potential. Directors can help management stay objective in determining a business unit’s merits. It’s another critical reason that board committees need structured, robust oversight around portfolio reviews.
Directors can help drive a level of governance — from an acquisition/divestiture perspective — that doesn’t look to predict optimal timing for a purchase or sale. Instead, boards can advise on a value-basis, taking a hard look at whether a particular capital acquisition strategy makes sense for the long-term, rather than simply looking at the price tag.
By delivering a value mindset, board members can guide the C-suite to look beyond market volatility. Assessing the underlying potential of a target company — or degraded fundamentals of a non-core business — can give management the confidence to act when appropriate.
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Follow us
