Global sourcing trends

Surge in Divestment amid Changing Market Conditions and Consumer Behavior

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Surge in Divestment amid Changing Market Conditions and Consumer Behavior

Looking back at the first half of 2017, a trend was observed of companies giving off some of their business divisions. Companies across industries have been active in terms of portfolio adjustments.

A Look at Some of the Divestments of H1 2017:

Avaya, a technology company, agreed to sell its networking business to Extreme Networks. The sale agreement stems from the fact that Avaya has been restructuring its debts due to the weight of private equity debts it bought in 2007 and has struggled to service it. The company also wants to focus on its unified communications and contact center solutions.

3M, a manufacturing company, has also been active in selling its divisions in recent years including traffic safety and security divisions and wants to focus on its core personal safety business. 3M agreed to sell its electronic monitoring business and transportation safety division to an affiliate of Apax Partners. This was done to improve the company portfolio and to focus on the rapidly changing trends in transportation safety and mobility, which include connected roadways.

3M will sell its tolling and automated license/number plate recognition business to Neology Inc. 3M believes that the best path forward for this business is with a company focused on tolling and electronic vehicle registration technology.

3M sold its identity management business (IMB) to Gemalto, as 3M believed IMB will be better positioned with a company that is primarily focused on security solutions.

McKesson, a healthcare company, sold 27 Rexall drug stores to Rx Drug Mart Inc.

Tech Mahindra, an information technology company, said it has agreed to sell a step-down subsidiary in Pakistan to Swiss firm Talkpool AG.

Why Do Companies Divest:

Companies have been trimming their businesses to not let their traditional business or divisions that no longer remain relevant for the company, affect its profitable businesses and overall revenue growth.

When a particular region does not seem to remain an attractive business opportunity for the company in the long run, the company pulls the plug either in part or full. This helps to reduce structural overheads in slow growing markets.

After acquiring another business unit, operational challenges could become overwhelming with the company deciding to re-sell the unit for better focus on existing segments.

Divestment also helps companies improve customer relevance, scale of business/productivity, agility, through a leaner operating structure.

To meet the disruptive industry scenario expectations and transformational technology-oriented requirements of the customers/clients, companies are looking to focus more on cloud and software-as-a-service, big data analytics, and block-chain technologies, to name a few. This would mean re-focusing and restructuring the current product/service structure.

Implications:

Job Cuts. For instance, after the merger of HPE’s enterprise business (HPES) with CSC, the newly formed company DXC Technology announced that as part of its cost cutting goals and to eliminate duplication of resources, it will close some of its centers in the UK and consolidate offices across Australia and New Zealand.

Client Loss for Supplier. For instance, after the CSC-HPES merger, Berner Kantonalbank terminated its contract with HPE Switzerland.

Changes in Contract. Clients may face challenges such as change in policies. This can lead to:

  • Modification in price and support structure
  • Inconsistency in quality of services due to change in talent providing the support
  • Discontinuation of certain products, funds for product research, or updates
  • Replacement of current product with the acquiring company’s product

Research & Development. It gives companies opportunity to direct funds towards research & development of products/services that are more focused on current technologies and services of the future. This may help them to drive organic growth as well as attract strategic acquisition opportunities with startups that are already focused on innovation and may require financial/operational/supply chain assistance to attain bigger goals.

Promote Competition. This can also give way to more competition due to reduction in concentration of market share with the bigger giants; for instance, when McKesson sold some its drug stores to Rx Drug Mart, it gave way to free competition.

How Can A Client Deal With Such Changes?

  • Re-negotiate terms of contract; include clauses protecting interests such as price, support, talent assigned etc.
  • Ask supplier how best the transition can be executed without facing deterioration in quality of support services.
  • Talk to the new management how they plan to optimize the opportunity and better the product after acquiring it and how customized solutions with additional features from the new company can be added to current subscriptions.
  • Look out for alternatives where easy transfer from one supplier to another is possible in case the current supplier fails to meet existing contract terms.

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