Platt Perspective on Business and Technology

Acquisitions and divestitures 8: the chop shop acquisitions and divestitures business model

Posted in startups, strategy and planning by Timothy Platt on May 10, 2013

This is my eighth installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Business Strategy and Operations – 2, postings 358 and following for Parts 1-7.) And in a fundamental sense I address with this posting, what many have come to see as the public face of acquisitions and divestitures per se – when they are not lumping the different business arena of mergers in with them.

I stated at the end of Part 7: divestitures in a troubled selling-business and change management context that I would turn in this posting to consider:

• Businesses that acquire other businesses and functional areas of them,
• To sell off those assets as marketable products, and with that acquisitions and divestitures process and any intermediate steps added in constituting their basic business models.

And in that regard, I noted that such businesses can be at least roughly divided into two camps and as pursuing two very different basic types of business model approach.

• One of these models, starting with the negative side of this overall phenomenon, is what I call the chop shop model (after businesses that “acquire” cars to dismantle them and sell them for parts – see chop shop as this term is used in its more standard automotive context for perspective.)
• The other basic model focuses on creating overall systematic value, and generally that means creating unique new sources of value for the acquiring companies they sell to as a means of creating value for themselves. This, I call the value added model.

The former and more negative and even pernicious of these two approaches is, unfortunately, all too often the only approach that comes to public mind for acquisitions and divestitures businesses and I will at least begin this part of the discussion by addressing that and by citing a still current news example, as of this writing, as a case study.

When Willard Mitt Romney ran for President of the United States as the Republican Party candidate in 2012 he did so claiming to be a successful businessman and a job creator from that. One area of his work experience that quickly became a very active topic of debate and I add point of contention was his leadership of a private equity spin-off of Bain & Company (where he worked for an earlier part of his private sector career) called Bain Capital. The point of controversy that developed out of Romney’s role at Bain Capital and that I add followed him through his years there included how Bain acquired controlling interest in, managed and sold off other businesses. And in some very significant cases that meant acquiring solidly performing businesses with good cash reserves seemingly just to gut them with massive fees while selling off their key assets until there was little of real value left – except the red ink value of debt. Charges and accusations were made that like the chop shop of the business model name, Romney and this company that he led acquired to break and take – and that for too many of its business acquisitions the goal was simply to bring large returns on investment into Bain Capital’s coffers, even as those acquisitions themselves died off as viable businesses and their employees lost their jobs as a result.

My goal here is not to take a position on whether or not Bain Capital in general or Mitt Romney in particular made their fortunes out of breaking up businesses for scrap, or if this was true, how much Bain Capital built its business around that approach during Romney’s watch. I cite this story and briefly note this political conflict and debate here to raise the specter of a very real phenomenon and how it sits in the public mind.

To put this business model in a fuller perspective, consider a business that is failing and that cannot be recovered through change management – and a discouragingly high percentage of businesses that enter change management processes still do fail anyway. The chop shop model as I call it could under those circumstances also be viewed as a liquidation model where whatever value that can be recovered in a business failure is.

• The problem that arises here is when this same approach is applied to sound businesses, and more specifically to businesses that are undervalued but that are basically sound and that could become better positioned in their markets again and more highly valued there too.

And this brings me to the driver that makes the chop shop model work, when it is actually pursued as such:

• Businesses that are targets of opportunity for chop shop model acquisitions and divestitures firms are essentially always undervalued. Their intrinsic overall value as determined by reasonable and prudent measures of resources held, debts held and on what terms, and ongoing business performance exceed and even greatly exceed presumed values assigned to them through their publically traded stock prices and related measures – the price they could be acquired for, at least as a matter of capturing controlling interest.
• Think leveraged buyouts and hostile takeovers here as mechanisms deployed to make that work.

Concerns that Mitt Romney was this type of businessman and that he pursued that type of business model did as much as anything to unravel his presidential bid – and whether or not this view of him is valid. And the political dialog revolving around Bain Capital and his role there over his 17 year tenure solidified the image of acquisitions and divestitures as a business model as being tantamount to “corporate raider.” But that should only be seen as one part to a larger and more complex story.

With that as complicating background, I come to consider the second basic approach to the acquisitions and divestitures business model: the value added model – which is all too often lost as a possibility under the press coverage and public opinion that chop shop model businesses and their threat create. I am going to more fully discuss the value creating model in my next installment in this series. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2. I have also included this series installment in Startups and Early Stage Businesses.

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