Retail banks have typically only divested reactively – when faced with a problem or external pressure that renders action unavoidable (e.g. the divestment of TSB from Lloyds Banking Group, or the forced sale of Williams and Glynn by RBS), preferring instead to passively hold on to businesses due to the cash flows associated with them or the relationships with customers that they provide. Their reluctance to divest has reflected a belief in retail banks that, whilst acquisitions are considered a strong, growth orientated action, a divestiture is the mark of a failing firm. This belief is self-perpetuating – postponing a divestiture until a business is obviously failing essentially guarantees that the move is seen as an act of desperation, further compounding the negative connotations associated with them and making retail banks even more reluctant to pursue them, particularly in an environment of low consumer trust and confidence in banks.
Companies that actively manage their business portfolios create substantially more shareholder value than those that passively hold their business. Moving from reactive to proactive divestiture is not easy, but holding on to business units for too long without proactive moves has associated costs of its own, as retail banks have found out to their detriment:
- The stability experienced from retail banks holding on to established business units too long has tempered any feeling of urgency and any desire to create new, high growth businesses, which has ultimately contributed to their exposure to threats from fintech firms and challenger banks.
- The mature, low growth, low margin environment in which retail banks operate has bred inflexible, risk-averse cultures that stifle creativity and innovative thinking, and has made it difficult for them to attract entrepreneurial talent at a time when, arguably, they need it most.
- Long held business units can take up investment funds, resources and management time, which could have gone to creating new businesses with stronger growth prospects. Executive teams can only manage a limited number of business units; a stagnant firm can leave management paralysed, unable to focus on new opportunities.
Divestiture needs to become a routine part of strategy and portfolio assessment. The following presents a set of guidelines that firms might look to in order to avail of divestitures and avoid the same fate that retail banks have suffered:
Step 1 – Preparation
Defining the strategy for divestment and communicating the rationale behind this to employees. A framework with mechanisms that ensure management activity actively considers divestiture should be established in line with this.
Step 2 – Identification and Analysis
Identifying the assets you want to sell, when you want to sell them, and to whom. Understanding the components of key capabilities within these assets – what activities are undertaken, how long they take, what technologies are utilised and what are the problems and challenges associated with them.
Step 3 – Deal Structuring
Due diligence on potential buyers needs to be undertaken before a deal is structured (it could be sale for cash, a spin-off to shareholders, or more complex structures involving contingent compensation or two-step transactions) and agreed.
Step 4 – In House Development
Communication of the deal at the appropriate time, before re-investing the funds, resources and management time into innovative ventures and attractive new growth opportunities.
Often, it takes a radical decision to achieve best practice. Divesting a stable business unit is a radical decision, but one which retail banks have failed to take – with the result being that they are risk-averse, lack creativity, struggle with innovation and are exposed to new threats. Divestitures need to be considered in the same regard as mergers and acquisitions, forming an interlocked set of tools that, if utilised proactively as part of the management of business portfolios, lead to stronger performance.