Don't forget to prune your portfolio

THERE are many reasons why executives shy away from divesting non-core businesses. They're reluctant to shed revenue, fear the market's reaction to a smaller company and don't want the challenge of stranded costs. They reason that the business could improve in time, or have trouble accepting the fact that it could perform better in another's hands.

But it's OK to divest. When strategically selected to clean up a company's portfolio and designed to command an optimal price, divestitures can generate significant shareholder value. They can also create a catalysing event for improving the remaining business. When done well, they reduce complexity and provide fuel for the company to pump back into its core.

As part of our ongoing work with divestitures, Bain & Company studied more than 2,100 public companies and found those engaging in focused divestment outperform inactive companies by about 15 per cent over a 10-year period, as measured by total shareholder returns (TSR). The results are even better for companies that combine focused divestments with a repeatable M&A model. They outperform inactive companies by nearly 40 per cent over a 10-year period and generate more than twice the sales and profit growth.