Page 157 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

Make Strategic Divestments

The decision to divest a business is always a difficult one.
However, divestments can become an important source of cap-
ital when resources are limited, allowing companies to refocus
and strengthen their core business.
BCG research indicates that companies divesting assets enjoy
substantial gains, increasing shareholder value by 1.5 percentage
points across all economic cycles. In fact, the study finds that the
capital market reaction is even more positive during downturns
than during upturns. Although the seller’s immediate concern is
to obtain the best possible price for the asset, the additional
increase in shareholder value achieved though the divestment
often outweighs any loss incurred in the sale. More important,
divestment decisions that are made early in a recession help the
seller to obtain a higher price for the asset and also put the com-
pany in a relatively better position to go on the offensive.
Chihiro Kanagawa, CEO of Shin-Etsu, took over leadership
of the specialty chemicals company in early 1990, at the begin-
ning of the Lost Decade in Japan. As noted in the previous
chapter, one of Kanagawa’s earliest decisions was to divest Shin-
Etsu’s noncore financial business and focus on the core
polyvinyl chloride market. The divesture gave Shin-Etsu an
early advantage and allowed it to enter the recession leaner than
many of its competitors. Indeed, Shin-Etsu was ahead of the
curve as the trend in Japan toward greater diversification of
companies continued throughout the 1990s. Research now has
shown a negative relationship between diversification and busi-
ness performance in Japan during the 1990s, a fact that many
companies finally realized by the early 2000s when a wave of
divestments swept across Japanese businesses. 6

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