618  Divestitures
­entire corporation. By the time the company is forced to conduct a fire sale of 
the assets, it has already destroyed substantial value and generally will receive 
limited proceeds from the divestiture. Managers should be in a better position 
than outsiders to determine a business’s performance prospects. Research has 
shown that as a business becomes more mature and competitive challenges 
increase, it loses the potential for ongoing value creation, and its total share-
holder returns start to decline, relative to the business’s industry sector.11 An 
opportune moment to divest the business is therefore shortly before market 
valuations begin to reflect its lower performance expectations.
For profitable and/or growing businesses, divesting can benefit both the 
parent and the business unit. Well-established, mature businesses provide a 
company with stability and cash flows, but holding on too long to this can 
also lead to what we would call corporate inertia. For example, relatively large 
and stable units may dampen the impetus to innovate—a critical driver of suc-
cess for smaller businesses in the portfolio. In addition, such large units often 
absorb a significant share of scarce management time that might be better 
spent on identifying growth opportunities. For example, under Bristol-Myers 
Squibb’s ownership, the orthopedic-devices business Zimmer relied on pric-
ing to grow its revenues. After its spin-off in 2001, it was able to boost growth 
by investing more aggressively in new technologies, introducing new prod-
ucts, and expanding to new markets.
Other costs include the distortion of economic incentives as a result of 
cross-subsidization between business units. This can lead to inferior decision 
making, as well as conflicts of interest between business units. For example, 
during the early 1990s, Lucent—at that time a business unit of AT&T and a 
successful maker of telecom equipment—was selling its products to many of 
AT&T’s competitors. To avoid conflict and to ease possible customer concerns, 
AT&T arranged to spin off Lucent in 1996. Conflicts of interest between busi-
ness units can also arise from capital structure decisions, which was a key 
reason for Tyco International’s 2006 health-care divestiture announcement. As 
Tyco CFO Chris Coughlin explains, “We were driving the capital structure of 
all of Tyco on the basis of what a company in the healthcare industry needed, 
but healthcare was only a quarter of our revenues. The other businesses clearly 
did not require that kind of a capital structure.”12 In these situations, a dives-
titure may create value because the subsidiary can become more competitive 
as a result of greater freedom to tailor financing and investment decisions, 
improved management incentives, or better focus.
A lack of parent company capabilities can hamper a business unit’s per-
formance. All businesses evolve through a life cycle, from start-up through 
11 R. Foster and S. Kaplan, Creative Destruction (New York: Doubleday, 2001).
12 L. Corb and T. Koller, “When to Break Up a Conglomerate: An Interview with Tyco International’s 
CFO,” McKinsey on Finance (Autumn 2007): 12–18.