“There are more fools among buyers than among sellers.” – French Proverb
Just as great innovation companies terminate waning projects to refocus resources on more promising opportunities, so too business leaders should regularly refresh their portfolio – selling non-core assets and redeploying those proceeds to fund their higher value strategic opportunities.
An excellent guiding question to identify a divestiture candidate is: “Are we the best owners of this asset?” The equation is straightforward:
Value To Buyers – Value To Me = Value Of Divesture
When the value is both positive and significant, I have my divestiture candidate. My goal is to find that “best” buyer and negotiate a price that captures as much of that differential as possible. But while the equation is simple, we usually calculate the wrong answer, overlooking divestiture opportunities.
One typical error in our calculations is underestimating the value that buyers may place on the asset.
Bad News / Good News
The Marketing Concept is adamant: Understand the mind of your customer.
When considering divestiture candidates, understanding the mind of your customer (the potential buyers) is just as critical. The bad news is that buyers’ perceptions are often seriously disconnected from reality. The good news (if you are the seller) is that their misperceptions work in your favor.
The Value To Buyers: Exploiting Over-Confidence
The research evidence is overwhelming: between 70% and 90% of acquisitions fail to bring value to the buyer because buyers usually overpay. Despite acquisition teams staffed by the best employees and highly paid advisors, several dynamics push buyers to pay too much.
For example: I listened to an investment banker gleefully recount how he sold a business at almost three times his own valuation. His method? Tapping into the egos of two rival CEOs bidding for the target. These were CEOs of two very, very large consumer products firms we are all familiar with. Yet they succumbed to irrational exuberance and ego in a bidding war and the seller prospered mightily. (For more examples of harmful acquisition biases, see “A Tip From Warren Buffett”)
The implication to divestiture reviews is clear: Don’t underestimate what buyers may pay. As you evaluate non-core assets, the question is not, “CAN they extract more value?” The question is, “Do they THINK they can extract more value?”
I usually caution executives against over-confidence, but when it comes to divestitures, allow optimism on the upper range of prices given the systemic over-optimism of buyers.