Divestmentsis greater than the whole. An example of this was provided by the Ford Motor
Companywhen it sold off Jaguarand Land Roverto the Tata Groupof India for an
estimated $2 billion in early 2008. Ford had bought these two businesses some years
earlier, but had experienced difficulties in running them at a profit.A need to raise cash
The need to raise cash may arise from a desire to make investments in other parts of
the business, perhaps including a merger. The reason given for many recent sell-offs
has been the desire to raise cash to enable a reduction in the level of capital gearing.
The UK speciality chemicals business Imperial Chemicals Ltdsold off Quest, its
flavours and fragrance business, to the Swiss business Givaudanfor £1.2 billion in
November 2006. It was believed in this case that the funds were needed to finance its
pension fund deficit and to improve its cash holding position.
Some sell-offs, particularly those involving smaller businesses, might be caused by
a need to raise cash to avoid being forced into liquidation (bankruptcy) as a result of
an inability to meet financial obligations. The sale of leading players by some English
Premier League football clubs (for example, Leeds United) over recent years provides
examples of this.
In effect, divestmentsare the opposite of mergers. Indeed, many of the divestments
that have occurred recently were of subsidiaries acquired by apparently rash mergers
during the 1970s and 1980s.
When assessing the effectiveness of a divestment, the corporate objectives of both
seller and buyer should be the touchstone. Assuming that shareholder wealth is the
major financial criterion, both parties should undertake an NPV analysis of the finan-
cial benefits and costs.
There are various means that are used to effect divestments, the more important of
which we shall briefly consider.Management buy-outs and buy-ins
Management buy-outs
In a management buy-out(MBO), the managers of the part of the business that is to
be disposed of buy it from the business. MBOs have grown enormously in number
over recent years in the UK. An example of an MBO occurred in 2007 when a man-
agement team at West Cornwall Pasty Co Ltdbought the business from the owners
who originally founded the business nine years earlier. The business has a chain of
shops selling more than seven million of its own Cornish pasties.
Some MBOs have proved to be very successful, and have led to the takeover or
stock market flotations of the bought-out undertakings. Some of these have made mil-
lionaires of the managers concerned. Saga Ltd, a business that provides insurance,
travel and other services to the over 50s, was taken over by the Automobile Asso-
ciation. Managers who had invested in the buy-out of the business saw the deal yield
about £280 million more than they had paid for Saga in 2004. These returns should be
set against the risk that the managers took in making the investment.
Since the managers are unlikely to be able to raise all of the cash necessary to make
the buy-out, some fairly complicated financing arrangements have been developed.
Borrowings have accounted for much of the finance: hence the label ‘leveraged buy-
out’ (‘leverage’ is another word for ‘gearing’). The high level of gearing required has
engendered relatively high-risk, high-interest-rate lending, known as ‘junk bonds’.‘
‘