The latest trend in M&A these days is divestitures: larger companies selling off pieces of their business. This trend is nothing more than a normal cycle, but it is critically important to understand. Every business leader has a specific reason for buying or selling a company (including selling their own business). The argument rarely includes general economic conditions, but the macro trends tell a different story: when economies are raging (regardless of the performance of the individual business), businesses become acquisitive, buying their competitors and strategic partners. Look at this chart of “merger waves”; the timing of each wave is eerily close to economic boom times. Some of this has to do with easier access to capital, marketplace opportunities, company performance, and other strategic reasons. But in lean times, or when economies are actually contracting, businesses sell assets.
Whether asset purchases are beneficial is debatable, but the overreaction that tends to come from external market forces is clearly not healthy. Mergers and acquisitions have been shown to have a poor track record in general, with failure rates as high as 90%. Yet M&A activity tends to spike when markets peak, arguably fueling a bubble: there were roughly $3.79 trillion in deals in 2006, marking a new record only to be bested by 2007. I suspect that if someone tested M&A performance inside and outside of a “merger wave,” they would find that the best purchases are done in down markets, when most companies are trying to unload assets.
When economies contract, so too do businesses, looking for non-core assets to divest or sell. It should be no surprise that in the Great Recession businesses had a Great Liquidation. For the last three years, there has been an unprecedented amount of corporate divestitures, break-ups, spinouts, and asset sales.
As with M&A, divestitures are also not always a good idea, particularly when they are precipitated by macro-economic conditions. To be sure, a huge amount of this stems from the glut of purchases made. Tyco bought and then sold many of its companies; AOL and Time Warner came together in a merger wave and split during the Great Recession; IAC was an amalgamation of companies created largely through acquisition that split into more coherent parts; and numerous companies such as Yahoo have been selling off assets that they probably should have never owned.
Of course, there is nothing inherently wrong with divestitures (in fact, my company, Dun & Bradstreet Credibility Corp., was formed as a result of a divestiture). But divestitures, like acquisitions, must be done for the right reasons. Companies should only divest non-core assets (not merely underperforming ones) and they should be done at a time when the divestiture leaves the core business better off (not merely during a downturn). Companies need to spend more time thinking about their core competencies: what they do better than anyone else. Those core competencies, not market or economic conditions, should ultimately drive decisions about M&A activity and corporate divestitures. This is how great companies make decisions: by focusing on core competencies, not external forces.
Jeffrey M. Stibel is Chairman and CEO of Dun & Bradstreet Credibility Corp. He is an entrepreneur, a brain scientist, and the author of Wired for Thought: How the Brain Is Shaping the Future of the Internet.