M&A Reasons to Sell: Divest a Division or Product Line - dummies

M&A Reasons to Sell: Divest a Division or Product Line

By Bill Snow

An owner doesn’t have to sell the entire company; selling a division or a product line is a very common M&A activity. Some of the reasons to divest a division or product line include

  • A bad acquisition: Here’s a bit of irony: Bad acquisitions are often the reason companies sell businesses, thus fueling a less-than-virtuous cycle (for Buyer’s shareholders) of making acquisitions at high prices and then selling them off at low prices, over and over and over.

    Sometimes Buyer is too large and the acquired company gets lost in the shuffle and declines from lack of focus and support from the parent. Other times, the acquired company suffers as a result of bad decisions by Buyer.

    Far too many acquired companies go downhill because Buyer decided to cut costs by firing the sales staff! Getting rid of the sales staff often has the effect of — surprise, surprise — reducing revenue. As the acquired company declines because of these bad decisions, it may start to lose money to the extent that Buyer eventually seeks to cut its losses by divesting the acquisition.

  • An overleveraged Buyer: Sometimes Buyer borrows too much money to finance the acquisition, and the slightest hiccup in the economy can impair the acquired firm, thus forcing Buyer to sell off the acquired company.

    Actually, Buyer’s lending sources most often force the issue when Buyer is unable to service the debt incurred to finance the acquisition. Buyer has to sell the acquisition (often at a bargain- basement price), or worse, the creditors may end up taking over the acquired business, resulting in a total loss for Buyer.

  • A money-losing division: The decision to sell a weak division is often very easy and straightforward, especially if the rest of the company is strong. Losses can drag down an otherwise-strong company, so instead of throwing good money after bad, a company may simply spin off a money-losing division to get rid of it and its offending losses.

  • A lack of synergy: Sometimes one plus one equals three. Many other times the grand plan of combining two entities doesn’t pan out.

    For example, say a marketing services company starts up a janitorial services division. Most likely, the parent company will discover two divisions in disparate markets are spreading the company too thin. The best course of action may be to sell off one of the offending divisions and focus on the core strengths of the company.

In the hands of the correct owner, divested divisions often rebound quickly. Far from being the bad gift that just keeps on giving, selling off a division or product line that doesn’t fit with Company A may be a perfect fit in the hands of Company B.