There’s a certain company in my industry that seems to be growing rapidly by buying out smaller companies or acquiring divisions of larger companies.
What factors cause a company to decide to sell one of it’s divisions or product lines to another company, even if that division is making a least a small profit? (Why the purchasing company would purchase it seems obvious - presumably they think they can make a profit from it.)
Are these sales usually the result of the seller putting the division up for sale, or does a purchaser contact a potential seller and suggest it?
Is it possible to find out the story behind these acquisitions? I mean more information that one usually finds in press releases.
Not the definitive answer, but consider the following market:
Synagogue-Mainland is a company which produces and prints corrugated cardboard containers and recycles glass bottles. Elfit-Rock is a company which produces and prints corrugated cardboard containers, recycles cardboard, maintains a forestry division, and recycles glass bottles. The recycling divisions resell the cleaned glass to other companies but reuse most of the recycled cardboard within their own company. At this point, you have two sets of corrugating and converting equipment, one set of cardboard recycling equipment, one giant swath of land devoted to growing new trees, and two sets of glass recycling equipment.
The recycling division at Elfit-Rock might well be profitable, but it’s also presenting issues: you have to have a separate training system set up for each line of equipment, the glass requires an additional sales team with a totally different client base than the corrugated recycling sales team, the maintenance workers need to be trained on two different types of machines, and so on. While it’s bringing some money in, it may well be the case that selling the division to Synagogue-Mainland could give Elfit-Rock a chunk of money that they could use to refine and improve the other corrugated-related divisions, while also allowing Synagogue-Mainland to expand their business.
My company was bought by a larger company 2 years ago. We had a division that did 100% of its work overseas in the field of health research and education. That division was sold off since it did not fit in with the rest of the bigger company and they did not know how to run that division. Also we have some military work which does not look good when the company is trying to do AIDS work in 3rd world countries.
There are a few more reasons. The company may need cash to pay back loans made when the outlook was rosier, and if the interest on the loans was greater than the profit of the division, it could go. Or the division is not making as much as other divisions, so getting rid of it frees up capital that will yield higher returns. GE, I believe, has a policy that any division must be 1 or 2 in its market, and anything falling back will get sold.
Some CEOs are into buying all sorts of stuff. A successor may want to focus more, and sell off divisions far from the core market.
The basic reason boils down to a company wanting to focus more in one area, or the other area costing more in time, resources, etc., than it’s worth.
Military contracting, for example, can bring in a lot of money, but dealing with the military has a whole lot of requirements and restrictions that companies selling to consumers or other private industries don’t have to deal with. A company might sell off its military operations to another contractor just to avoid the hassle.
Another classic example is retailing. A company that decides to supply the retail market has to invest huge sums in distribution, a sales force, marketing and promotions, etc. I had a client who invested a huge amount of manpower and money trying to build a retail market, but couldn’t get up to the top echelon of its market. It gave up on retailing and went back to producing private-label products (store brands.) Much lower profit margins for each item, but way fewer customers, distribution problems, marketing programs, etc., to deal with.
I worked at a company that owned 5 primary brands (divisions), 1 brand was making money, the others barely surviving. Owners wanted to take the good part of the company public, they needed to jettison the other parts to be able to do it.
Still another reason is that if one division supplies another, it might also want to supply competitors. One reason for the AT&T divestiture was the piece that became Lucent was having a hard time selling to the BellCos given that they were worried that AT&T wanted to muscle in to the local markets. Splitting Lucent from the main business made it an even playing field, and the strategy even worked for a while.
You asked about how the sales are started. The answer to that part is that it can be either the seller or buyer initiating. I just finished reading an article in the latest Inc. in which one of the entrepreneurs has made a strategy of approaching large companies to buy some of their smaller divisions that would work well with his businesses.