“Executives spend a lot
of time creating and acquiring businesses but rarely devote attention to
divesting them. As a result, they often end up selling businesses too late and
at too low a price, sacrificing shareholder value”, state Dranikoff, Koller
and Schneider in their 2002 published article titled “Divestiture: Strategy’s
Missing Link”. The 3 former McKinsey consultants highlight why and how
divestiture can be a powerful instrument to create value and growth.
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| Figure 1. Thyssenkrupp's downward spiral. Reprinted from Financial Times, by J. Miller, 2019, https://www.ft.com |
Nonetheless, real life
implementation is never as easy as literature may implicate and that is also
what we see when looking at the news of German industrial engineering and steel
production company Thyssenkrupp AG (TKA) nowadays. The multinational
conglomerate is facing tough times as they recently published their 4th
profit warning in a row and their operating profit almost halved over the last
year while net debt increased in €5 bn (FT). As a result of the miserable
situation, Martina Merz replaced Guide Kerkhoff as interim CEO, a business move
that might have set the cornerstone for a valued €15 bn acquisitions in 2019
(Reuters). Ms. Merz clarified as soon as possible that under her new
management, Thyssenkrupp’s Elevator business unit will be sold fully or minimum
partially. This leads to big questions for shareholders and investors: Why sell
the unit that makes €600 m in operating profits (FT) every year while keeping
the cash burning marine system business? Why not proceed with the plan of a
Thyssenkrupp Elevator IPO in 2020 and afterwards take advantage of the newly
raised equity? But most importantly: Will the divestiture increase
shareholder’s value or not?
Referring to Thyssenkrupp’s unfortunate financial situation again, the sell-off can be justified as the firm is facing cash outflows in the billions. The transaction would put the German plc in the situation to pay back its short-term debt, improve the liquidity situation and, without a doubt, lead to an increased “special” dividend for the shareholders. Furthermore, not only the existing shareholders could be satisfied but also potential investors trust may be restored by fixing the balance sheet in the short run, attracting new investments.
Referring to Thyssenkrupp’s unfortunate financial situation again, the sell-off can be justified as the firm is facing cash outflows in the billions. The transaction would put the German plc in the situation to pay back its short-term debt, improve the liquidity situation and, without a doubt, lead to an increased “special” dividend for the shareholders. Furthermore, not only the existing shareholders could be satisfied but also potential investors trust may be restored by fixing the balance sheet in the short run, attracting new investments.
Although, “short run”
might be the key word in this case as higher dividends and less debt are
without saying a positive market signal, but do not seem like bringing the
former DAX company back on track by creating natural long-term growth through
innovation. To achieve this, a disruptive business plan on how to face a
potential future without demand for submarines and cars out of steel would be
so desperately needed to be set up before a sale gets executed.
In order to find a
solution for the back and forth of the discussion on divestiture, the initially
quoted article by Dranikoff et al. tries to set up a guideline for companies on
how to decide whether divestiture is an efficient strategy to increase
shareholder value or not. Therefore, the potential deal gets examined under 3
different perspectives:
Firstly, the “Cost of
Corporation” must be weighed carefully. The authors claim that stability
through established business units breeds comfort in the company and therefore
increases the probability of stagnation and missed-out growth opportunities.
Applied in the present case, Thyssenkrupp might underestimate the gravity of
its situation and financial downturn when keeping a stake in the prosperous
elevator business. On the other hand, the firm's core business, meaning the
production of steel parts for the automotive sector, is in a structural decline.
It does not appear as having any high-growth potential and therefore does not
present an appealing target for investors. By selling their last attractive
unit, TKA might also sell their last chance of a long-term recovery.
Secondly, the “Cost to the
unit” of every firm must be studied thoroughly to gain knowledge about the
required expertise concerning its business unit’s current life cycle in order
to ensure an efficient management. The occurring problem is that no company can
cover “Launch, Growth” and “Maturity” phase and therefore, divestiture and
acquisitions are the logical consequences. Referring to Thyssenkrupp, the
established multinational and over a 100-year-old company (meant is the former
Thyssen AG) rather seems like having the capabilities to consolidate and lead
well-built corporations than setting up disruptive business plans. From this
point of view, the sale might destroy shareholder value when taking into
consideration that the elevator unit is a global leading multi-billion-euro
business that fits TKA’s strategic phase expertise perfectly.
Lastly, the theory of
“Depressed exit prices” suggests that longer existing businesses tend to
destroy shareholder value, not because they get inevitably unprofitable, but
because markets do not reward long-term steady performance with increasing
share prices (Foster & Kaplan, 2001, as cited in Dranikoff et al., 2002).
This implies a simple “sell as soon as possible” guiding principle which is
likely to be oversimplified but still supports the German steel manufacturer’s
divestiture plans, precisely because of the already published potential
oversized elevator unit valuations between 15 and 20 billion Euro.
Having
applied the guideline on the present case, I think there are still way too many
open questions regarding the valuation of the divestiture. Decisions of such
financial and entrepreneurial significance can not be simply judged as positive
or negative by following a standardized red thread. However, I am convinced
that the point Dranikoff et al. want to make is, despite the date of
publication, still an important one: Managers have to give business sell-offs
the same attentiveness as mergers and acquisitions if they are truly seeking to
create sustainable long-term shareholder value.Bibliography
Dranikoff, L., Koller, T., &
Schneider, A. (2002). Divestiture: Strategy's missing link. Harvard
Business Review, 80(5), 74-83. Retrieved from http://search.ebscohost.com
