Getting Dirty Firms to Clean Up Their Act: Should You Divest or Invest? Frank Hawkins Kenan Institute of Private Enterprise


Getting Dirty Firms to Clean Up Their Act: Should You Divest or Invest? Frank Hawkins Kenan Institute of Private Enterprise


As companies grow, they may become involved in too many business lines, so divestiture is the way to stay focused and remain profitable. Approaching the SAP divestiture as purely IT-driven without consulting experts in the business can lead to the wrong approach, SAP’s Rombach says. He sees a tendency to have a hasty timeline and go for a very quick-and-dirty approach using homemade, uncertified tools, which can poorly affect audit compliance, for example.

The agencies have also accepted divestiture of retail stores, factories, etc., where the divestiture includes all the assets needed to compete. For example, in 2014, the DOJ required the divestiture of two paper mills in clearing Verso Paper Corp’s acquisition of NewPage Holdings Inc. For intangible assets, such as intellectual property or rights, divestitures are usually accomplished through either the sale of the assets or licensing. For instance, in the remedy resolving the DOJ’s challenge to the 2013 merger between US Airways and American Airlines, the DOJ required the parties, among other things, to divest certain slots – which are rights to take off or land – at slot-controlled airports. The DOJ believed the slot divestitures, with the other required remedies, would help ensure that low-cost carriers would have the ability and incentive to compete successfully against the merged entity.

Kennecott opposed and objected to the government’s suggestion of a copper supply contract being given to a new spin-off Okonite company with an indefinite amount of copper based on Okonite’s unknown requirements for a period of ten years. Kennecott’s continued objection to such terms as tending to jeopardize the copper supply of its other customers still is formalized in the time and quantity provisions of the proposed LTV contract. The process of dividing a business may take many various shapes and forms.

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Divestiture can also occur as part of a closure or bankruptcy proceeding. Companies may decide to divest in a business or asset for several reasons. Management might pursue divestiture if it believes an asset or business unit is underperforming, or that an old investment is no longer a core competency in alignment with the company’s strategic vision.

What happens when a company is divested?

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Which industries appear to be the best and worst ones to be in and the attractiveness of all the industries as a group from the standpoint of the company’s long-term performance and market strength. A firm is missing some essential skills, capabilities, or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps. Assessing whether the diversification move will benefit shareholders due to gains in earnings per share and faster stock price appreciation. Evaluating whether the diversification move will produce a synergistic outcome such that the company’s different businesses perform better together than apart and the whole ends up being greater than the sum of the parts.

What are the pros and cons of divestitures?

Accordingly, the antitrust agencies may require a divestiture package that goes beyond the specific relevant markets in which there are competitive concerns if additional assets are required to preserve competition effectively in those relevant markets. In terms of the assets to be divested in structural remedies, the requirements are fact-specific. Although each transaction is unique, the ‘Division favors the divestiture of an existing business entity that has already demonstrated its ability to compete in the relevant market’. However, depending on the facts and circumstances, the agencies may accept a divestiture of less than an existing, intact business or may demand more than an existing, intact business. In situations where less than an existing business is being divested, the agencies may consider other protections, such as an upfront buyer or ‘crown jewel’ provisions, both of which are discussed in more detail below, and elsewhere in this book.

Establishing investment priorities and steering corporate resources into the most attractive business units. One of the most famous cases of court-ordered divestiture involves the breakup of the old AT&T in 1982. The U.S. government determined AT&T controlled too large a portion of the nation’s telephone service and brought antitrust charges against the company in 1974. The divestiture created seven different companies, including one retaining the name AT&T, as well as new equipment manufacturers.

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This, it is claimed, will be detrimental to competition and will give LTV a substantial advantage over independent copper fabricators who must rely on Kennecott for their necessary copper supply. Okonite manufactures a broad range of insulated copper wire and cable, as well as some bare wire. About 77% of Okonite’s 1964 sales of insulated wire and cable were of “power wire and cable” and its bare wire is also sold for “electrical transmission”. Okonite’s principal customers are the electric utilities and contractors and industrial firms involved in the construction of plants and buildings.

Structural Remedies

We remain laser-focused on delivering on our mandate and executing on our strategic priorities with excellence and empathy. I feel immense pride seeing all that our team has achieved and the positive momentum we’ve built for the journey ahead. With each transaction, we take a step forward in simplifying the firm, ensuring long-term shareholder value and redefining Citi’s success for the years to come. The Code of Federal Regulations is the official legal print publication containing the codification of the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government.


A company subject to a divestiture requirement should generally be required to submit regular periodic reports detailing the steps it has taken to effect divestiture. Reports should set forth in detail such matters as the identities of potential buyers who have been approached by the company, the dates of discussions with potential buyers and the identities of the individuals involved in such discussions, the terms of any offers received, and the reasons for rejecting any offers. In addition, the reports should indicate whether the company has employed brokers, investment bankers or others to assist in the divestiture, or its reasons for not doing so, and should describe other efforts by the company to seek out possible purchasers.

Nonetheless, the antitrust agencies recognise that some degree of continuing relationship may be required post-divestiture to help ensure the competitive viability of the divestee. For example, short-term transition services agreements can be required as part of the divestiture package whereby the merged company provides supply contracts, IT support, human resources assistance, maintenance and repair commitments, etc. In fact, DOJ consent decrees often require that transition services be provided at the divestiture buyer’s option and provide that those transition services agreements can be extended subject to the DOJ’s discretion.

However, as businesses expand, they may discover that they are involved in too many lines of business and that they must shut specific operational units to concentrate on more lucrative lines. Instead of being closed down in bankruptcy or any comparable situation, divvied-up business pieces may scatter into their businesses. As part of the conditions of a merger, companies might force to sell some of their assets. In addition, governments may choose to sell part of their holdings to provide the private sector with an opportunity to benefit.

  • In 2006, Kodak decided to divest itself of its digital camera business and sell the operations to Flextronics.
  • With LTV’s investment in Okonite of approximately $30,000,000 we have every assurance that an alert, capable organization will not idly sit by and see that investment lost through lack of effort on its part to prevent it.
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  • Some companies choose to divest themselves of certain assets on ethical grounds.
  • In certain circumstances, the antitrust agencies may require ‘crown jewel’ provisions, which require a more marketable divestiture package to be provided to a divestiture trustee to sell if the merging parties are not able to sell the originally agreed package of assets within the agreed period.

To require Kennecott to continue to supply funds, over an indefinite period and in uncertain amounts, would defeat the very purpose of the final judgment for it would only serve to continue Kennecott’s interest in and association with Okonite. The government opposes approval of the proposed sale of Okonite to LTV contending that it will not “constitute adequate relief in this case.” It argues that its “spin-off” proposal is in fact entitled to a presumption over defendant’s proposal of sale. We do not accept this as an accurate statement of the law. With the government’s consent to the procedure, this hearing proceeded with the focus of the hearing placed primarily on the defendant’s proposal.

See also 2011 DOJ Remedies Guide, at 7 (‘to ensure an effective structural remedy, any divestiture must include all the assets, physical and intangible, necessary for the purchaser to compete effectively with the merged entity.’). On the heels of its settlement with CenturyLink, the DOJ announced a reorganisation that, among other things, established the Office of Decree Enforcement and Compliance, which will ‘have primary responsibility for enforcing judgments and consent decrees in civil matters’. This new office appears similar to the Compliance Division at the FTC, which, among other things, ‘help draft and negotiate Commission orders . And oversee company conduct required by the order’ and ‘go to court to enforce Commission orders and to seek penalties for order violations’.

When a divestiture requirement is imposed, the company affected should generally be asked to submit a divestiture plan promptly for review and approval by the Reserve Bank or the Board. Such a requirement may be imposed pursuant to the Board’s authority under section 5 of the Bank Holding Company Act to issue such orders as may be necessary to enable the Board to administer and carry out the purposes of the Act and prevent evasions thereof. A divestiture plan should be as specific as possible, and should indicate the manner in which divestiture will be accomplished—for example, by a bulk sale of the assets to a third party, by “spinoff” or distribution of shares to the shareholders of the divesting company, or by termination of prohibited activities. In addition, the plan should specify the steps the company expects to take in effecting the divestiture and assuring its completeness, and should indicate the time schedule for taking such steps.

department of justice

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Divestiture allows companies to cut costs, repay their debts, focus on their core businesses, and enhance shareholder value. Make the transactional clean up of the company being divested part of the project. Of course, a lot of the parameters for the project are dictated by the divestiture itself—i.e., the project timeline linking to what is agreed upon in the actual divestiture. That means the projects can be as short as two to three months, and there isn’t time to go through the traditional test cycles, Romaniello says. Having involvement from the users who know the software best is crucial, since you’ll be relying on their knowledge, past documentation and past test scripts.

To accomplish this, a copy was taken of the entire SAP system and the Tools division isolated, carved out and moved (over four months’ time). The problem was the Tools division shared customers with other Cooper divisions. And the subsequent copied—and open—Tools transactions remained in Cooper Industries’ SAP system after the Tools division had been moved off. Those transactions weren’t open in reality, but this was obviously adversely affecting business for the other divisions—as Cooper’s customers’ credit limits and exposure still reflected those open transactions. “In other words, the essential change that I would make would be to strike out `publicly owned’, and I would insert that the divestiture might be accomplished by sale or other means or methods.

As the FTC explains, these provisions may be required ‘where there is a risk that, if the respondent fails to divest the original divestiture package on time . Or if the original divestiture falls through for some reason, a divestiture trustee may need an expanded or alternative package of assets to accomplish the divestiture remedy’. This situation can arise when a new buyer may need a different or larger package of assets to be competitive or because it will be easier and quicker for the divestiture trustee to sell a more marketable package. For example, the FTC included crown jewel provisions in the 2003 remedy that resolved Quest Diagnostic’s transaction with Unilab.

  • Occasionally, the antitrust agencies will require that an entire package of assets be divested to a single acquirer only.
  • Indeed, some orders have required divestitures to be ‘absolute’, meaning the merging companies ‘have no continuing ties to the divested business or assets, no continuing relationship with the buyer, and no financial stake in the buyer’s success’.
  • Business units are sometimes disposed of to improve a company’s value, and redundant investments or subsidiaries are often sold after a merger takes place.
  • Which industries appear to be the best and worst ones to be in and the attractiveness of all the industries as a group from the standpoint of the company’s long-term performance and market strength.
  • Companies may decide to divest in a business or asset for several reasons.

Have already resigned from the quickbooks payroll and Office of President of each of TRPI and ACAI. Consequently, you are no longer involved in the management of the affairs of these corporations. ACAI entered into a Lease Agreement with the MBTA on June 3, 1988. The Lease Agreement is in effect for an initial term of 10 years and 6 months and generally grants to ACAI the right to use and sublease for commercial and retail purposes space located at the MBTA Alewife Station/Garage Complex in Cambridge, Massachusetts.

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