1. Corporate Strategy Divestures and Restructuring Session 13
Dr. Olivier Furrer

2. Need for Restructuring

3. Number of Divestitures, 1965–2000

4. Restructuring and Divestment
Why restructure or divest?
Pull-back from overdiversification.
Attacks by competitors on core businesses.
Diminished strategic advantages of vertical integration and diversification.
Exit strategies
Divestment: spinoffs of profitable SBUs to investors; management buy outs (MBOs).
Harvest: halting investment, maximizing cash flow.
Liquidation: Cease operations, write off assets.

5. Reasons for Divestitures
No. of Divestitures
Change of focus or corporate strategy 43
Unit unprofitable or mistake 22
Sale to finance acquisition or leveraged restructuring 29
Antitrust 2
Need cash 3
To defend against takeover 1
Good price 3
Total 103
Source: Kaplan and Weisbach, 1992

6. U.S. Mergers and Acquisitions versus Divestitures, 1965–2000
Source: Mergerstat Review, 1994–1998, 2001.

7. Strategies in Declining Industries
High
Divest Quickly
Niche or Harvest
Leadership: Seek a leadership position in terms of market share.
Niche: Create or defend a strong position in a particular segment.
Harvest: Manage a controlled disinvestment, taking advantage of strengths.
Divest Quickly: Liquidate the investment as early in the decline as possible.
Intensity of Competition in Declining Industry
Harvest or Divest
Leadership or Niche
Low
Few strengths
Many strengths
Company Strengths Relative to Remaining Pockets of Demand
Source: Adapted from Porter, 1980

8. Turnaround Strategy The causes of corporate decline
Poor management: incompetence, neglect
Overexpansion: empire-building CEOs
Inadequate financial controls: no profit responsibility
High costs: low labor productivity
New competition: powerful emerging competitors
Unforeseen demand shifts: major market changes
Organizational inertia: slow to respond to new competitive conditions

9. The Main Steps of Turnaround
Changing the leadership
Replace entrenched management with new managers.
Redefining strategic focus
Evaluate and reconstitute the organization’s strategy.
Asset sales and closures
Divest unwanted assets for investment resources.
Improving profitability
Reduce costs, tighten finance and performance controls.
Acquisitions
Make acquisitions of skills and competencies to strengthen core businesses.

10. Types of Restructuring
Portfolio Restructuring
Portfolio restructuring involves significant change in the firm’s configuration of lines of business through acquisition and divesture transactions.
Financial Restructuring
MBO and LBO. The assumption is that a large amount of dept will force managers to focus on their core businesses, and not squander cash flows from the core businesses in less rewarding diversification projects.
Organizational Restructuring
Traditionally, organizational restructuring has been shown to be ineffective because it is disruptive and may destroy competencies

11. Restructuring Managerial Incentives
Corporate Executives’ Compensation
To prevent overdiversification
Divisional Executives’ Compensation
To attract and retain talents
To encourage cooperation or competition
To balance short-term and long-term objectives
To control risk-taking behaviors

12. Restructuring Managerial Incentives (Cont’d)
Headquarters managers of the parent company may want to change the incentive structure to encourage different behaviors among divisions.
For example, executive in an entrepreneurial division needing growth may receive low salaries and limited short-term earnings incentives but significant “phantom” stock options in order to create more risk taking.
A division at a later growth stage may emphasize salary and short-term bonus and play down stock options.

13. Restructuring Managerial Incentives (Managerial Implications)
Many executive compensation plans provide incentives (perhaps unintended) for corporate managers to diversify their firms and thereby increase the firms’ size. Thus, corporate incentive compensation should emphasize firm performance over which managers have some control, regardless of firm size or diversity.
Incentive based on annual ROI may enhance short-term performance but reduce divisional managers risk taking.
Long-term incentives alone are not adequate. To be most effective, they should be combined with other forms of restructuring, particularly downscoping.
Long-term incentives also have trade-offs; for example, long-term incentives based on divisional performance may reduce cooperation among related divisions.
To be meaningful to executives, incentives should be linked to a level and a type of performance that board members can link to managerial action. They should also be based on challenging but achievable targets.
Source: Hoskisson and Hitt, 1994

14. Downsizing
Risk of lost of human capital

15. Restructuring Activities
Downsizing
Wholesale reduction of employees
Downscoping
Selectively divesting or closing non-core businesses
Leveraged Buyouts (LBO)
Financial restructuring in align managers’ focus and shareholders’ interest
Source: Hoskisson and Hitt, 1994; Hitt, Hoskissson, and Ireland, 2007

16. Downsizing
Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units, but it may or may not change the composition of businesses in the company’s portfolio.
Thus, downsizing is an intentional proactive management strategy, whereas “decline is an environmental or organizational phenomenon that occurs involuntarily and results in erosion of an organizational resource base” (McKinley, Zhao, and Rust, 2000).
In 2005, GM signaled that it will lay off 25,000 people throughout 2008 due to poor competitive performance, especially as a result of the improved performance of foreign competitors (Wall Street Journal, 2005).

17. Downscoping
Downscoping refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses.
Commonly, downscoping is described as a set of actions that causes a firm to strategically refocus on its core businesses (Danikoff, Koller, and Schneider, 2002).
In 2005, Sara Lee Corporation has decided to spin off its apparel business in a “massive restructuring that will shed operations with annual revenues of $8.2 bio.” It will try “to focus on its strongest brands in bakery, meat and household products.” The restructuring will trim revenues that used to account for 40 percent of sales. The company plans to use some of the savings to R&D new products in its top selling brands (Wall Street Journal, 2005).

18. Leveraged Buyouts Purchase involving mostly borrowed funds
Generally occurs in mature industries where R&D and innovation are not central to value creation
High debt load commits cash-flows to repay debt, creating strong discipline for management
Increases concentration of ownership
Focuses attention of management on shareholder value
Greater oversight by “active investor” board members
Leads to more value-based decision making

19. Emphasis on Strategic Controls
Restructuring and Outcomes
Short-Term Outcomes
Long-Term Outcomes
Alternatives
Loss of
Human Capital
Reduced Labor Costs
Downsizing
Reduced Debt Costs
Lower Performance
Downscoping
Emphasis on Strategic Controls
Higher Performance
Leveraged
Buyout
High Debt Costs
Higher Risk