Five biases that could derail your next deal

Companies are navigating a dynamic and highly competitive deal landscape where revenue and profit growth is elusive. A critical lever they have is reshaping their portfolios and reallocating capital to help generate greater value in their company — such as increasing digital capabilities, entering new markets and expanding distribution channels. 

When deciding whether a business unit no longer aligns with a company’s strategy, financial variables can be a key consideration. However, according to a PwC study, The power of portfolio renewal and the value in divestitures, executive biases and emotions also have a significant impact on the decision-making process. In fact, only 40% of respondents believe their company fully embraces divestitures. Many of the remaining 60% stated their company views them as a sign of defeat, creating stigmas before the deal process has even begun.

Business leaders should be especially mindful of how their own mentality may affect strategic decision-making and ultimately hinder value creation for their company.

Here are five executive biases that may be impacting your portfolio review and divesting process:

1. Attitude can matter. Are you actively embracing divestitures or reluctant to consider them? Reluctant divestors tend to delay decision-making and decide to divest only after value has eroded. According to the PwC study, going into a portfolio review with an open mind and a positive attitude can not only increase the chances of executing a successful divestiture by as much as 250%, but leaders who act quickly to chart a new path and sell the unit can significantly increase their chances of a positive return. These decisions can feel uncomfortable, but effective capital and resource allocation rests in the balance of managing short-term discomfort in pursuit of long-term strategic growth.
2. Founder influence can mean delays. Research findings from the PwC study indicate that companies with longer operating histories are less likely to divest and often take longer to review their portfolio, especially when the founder is involved. When a business unit is rooted in the company’s history and the founder feels personally attached to it, there is a 66% chance the decision to divest will take longer than six months, likely greatly impacting the company’s chances of creating value. Emotional attachments make us human, but having a business unit that isn’t aligned with the core business can be a strategic problem, and strategic problems should be addressed objectively.
3. Overconfidence can erode value. Executives often believe they can control the situation and fix the struggling business unit, even when divesting is the better option. This typically results in committing additional capital to a lower return on invested capital business and likely delays the inevitable. In fact, according to our study, of the companies surveyed who chose to try and fix the business by investing more, 57% said the unit’s performance deteriorated or stayed the same. While it may feel like you’re “giving up” before you’re ready, the business is likely better off being sold to a different owner.
4. It can be easier to stay the course. Executives — like most people — may resist change even when it can be beneficial. There are people and process impacts, tax consequences and stranded costs to manage. However, there is also the opportunity to intentionally reinvest in your company’s strategic growth and long-term viability, while allowing a business to potentially thrive elsewhere.
5. Divesting can feel like failure. Within the PwC study, the two most prominent themes affecting decision-making were regret and loss of prestige. The leaders at the table will likely have ties to the business and the people in it. If the business unit under consideration for divesting originated from a deal that involved existing senior leaders, there is a 71% decrease in likelihood that the company will divest. It’s important to remember that the decision to divest may not be an indication of failure or lack of effort from the team; it simply may be the natural course of business.

First, acknowledge the issue. Have a candid conversation with your team and create a trusted environment where you can openly discuss potential biases. Then, design a formal, persistent portfolio review process to confirm you’re regularly examining the business units within your company and their strategic fit. Less than a third of survey respondents reported having a formal and standardized portfolio review process. If that sounds familiar, you can read more about portfolio review factors in PwC’s The power of portfolio renewal and the value in divestitures study, including the decision-making fallacy that can often delay the decision to divest.