We have mapped out two paths to consider for starting the process of rightsizing your portfolio and navigating toward a more digitally oriented future. These paths are largely complementary and may even overlap.
Route A: Spin-offs
Ask yourself, “Are we truly running efficiently, or are our legacy businesses dragging us down?” Aggressive acquisition sprees of the past have created broad and, some might say, bloated portfolios that are hobbling opportunities in the digital economy, constraining financial and strategic resources that should be targeted at new growth platforms and innovations in product areas closer to the company’s core and customer needs.
By divesting unneeded parts of overly diversified product portfolios, industrial manufacturers can achieve a number of critical outcomes:
- Free up cash for research and development of more valuable, strategic, and so-called disruptive products
- Begin a broader streamlining of the overall corporate bureaucracy, which may be prohibiting agility
- Help identify and shed business units in areas that don’t easily lend themselves to IoT technology, which is particularly important for companies that see their future tied to connecting highly engineered products to associated services
- Stay off the radar screen of activist investors that are increasingly compelling large conglomerates to unlock value
Recently, some industry players have begun to take the divestiture path precisely to address one or more of these imperatives. For instance, General Electric (GE) announced plans to divest its water and industrial solutions, transportation, current, and lighting divisions, representing total revenues of $20 billion over two years. GE is also exploring the possibility of spinning off its healthcare information technology businesses, and in the past few years it has pruned its portfolio by shedding NBCUniversal, its plastics division, and most of GE Capital.
Similarly, in October 2017, Honeywell announced its intention to simplify its broad portfolio by spinning off two stand-alone, publicly traded companies: one from its transportation systems business and the other from its Homes product portfolio and ADI global distribution business. The decision was part of a rigorous portfolio review that will allow Honeywell to focus on high-growth businesses related to aerospace, commercial building products, performance materials, and safety products. The move also frees up as much as $15 billion for acquisitions in more innovative technologies and product areas.
Although acquisitions in digital and IoT arenas are tempting, it’s important for industrial manufacturers not to waste the opportunity to build more connected technology capabilities internally after a broad divestiture. Which brings us to the second route that companies could travel.