When news surfaced that 3M Co. is reportedly selling its drug delivery business, it wasn't exactly surprising that 3M would sell one of its homegrown successes. The company sells businesses all the time.
But why this one? 3M has not confirmed it's even selling the business, so it's not exactly explaining its rationale. But we already know why — and finding the right assets to sell is one of the underappreciated arts of good management.
Buying and selling companies is more or less a core business activity of companies organized like Maplewood-based 3M, handled by staff generally organized under the heading of corporate development. A quick search on the networking site LinkedIn turned over quite a list of 3M staffers doing corporate-development jobs.
In fact, the list of businesses 3M has formally disclosed as having sold in the recent past seems to be as long as the list of things it has bought.
Among the divestitures disclosed this year includes a gas and flame detection business and a pending deal to sell what 3M called its "advanced ballistic-protection business," which does about $85 million a year selling helmets, body armor and the like.
It hasn't been a good year for 3M, with a lot of its business in sectors or regions that have been having an even worse year. Its stock has slipped about 12% so far this year, with most of the damage coming in April and May. The broader market averages, meanwhile, have surged more like 25% this year.
The drug delivery unit had sales in the first three quarters of the year of about $300 million, down more than 10% from the same period of 2018. It's not exactly a distressed operation, though, as Bloomberg reported that the unit could sell for $1 billion, citing people with knowledge of the deal.
The company isn't selling its drug delivery unit because it needs the money, either. It had $1.7 billion of free cash flow just in its most recent full quarter. The company did complete its acquisition of surgical wound-care products company Acelity, Inc. this fall for about $4.5 billion plus the assumption of some debt, but this new business unit makes money.
So why sell drug delivery? It could be as simple as it's worth more to somebody else.
In a study a couple of years ago by consultants Bain & Co., companies it described as "focused divestors," meaning most active in buying and selling, significantly outperformed the buy-and-hold crowd in total return to shareholders.
The main failing of the inactive companies was sticking with businesses when the strategy no longer made much sense. And while strategy might be a word that has been stretched out of shape, the best way to describe it is as the way a company plans to win against its competitors.
If hanging onto a business no longer helps the company win, Bain observed, it's not likely to perform very well and only takes capital and management time that would be better deployed elsewhere.
The companies with a more active approach still had to do a good job selling the assets to get the best returns, including making a business attractive to potential buyers and not just hiring a broker to dump it. When it works, though, everybody wins.
The buyer gets a business that's worth more to them. The seller gets to take the money from the sale and invest it in opportunities that generate higher returns.
This idea of relative value is an interesting one to think about. There's generally no sale of anything, of course, unless both sides think they have received a price that's fair. Even in a situation where the seller has long wished to get rid of something — here in Minnesota, an old boat comes to mind — buyers seem really happy with the deal.
With businesses, it could easily be the case that a business worth no more than $1 million in the portfolio of the Ajax Co. might be worth $1.5 million to the Acme Co. The CEO of Acme Co. isn't going to want to pay the full $1.5 million for it, of course, instead hoping to keep most of the additional value that would come if they owned it. And so they negotiate.
A great example of what's called strategic fit is figuring out what to do with a business that has in the past grown a lot through new products, each more capable than the one that preceded it. Of late, though, customers haven't cared so much about what's new and appeared to care more about what it costs.
If what a company really knows how to do is R and D, though, that's another way of thinking of its strategy for winning. The plan is to out-innovate its competition. But if the customers don't care as much anymore about what's new, then the company ought to sell this business. A likely buyer is a company that sees operational excellence and efficiency as the way to win.
In an earlier article in the Harvard Business Review, Bain partners discussed the idea of what's called a value fit, meaning that even if a business unit doesn't advance the new strategy a lot it's still a good idea to keep it. An example was how Walt Disney Co. once bought back some retail stores, even though it didn't really want to be a retailer. It simply made more money operating those stores than anybody else could.
Small companies don't hire expensive consultants like Bain or McKinsey & Co. to sort out these questions and will have a tougher time managing a portfolio without the kind of corporate development staff 3M has assembled. It's hard work selling a business, including figuring out what to do with facilities or people that supported the old business that will still be there, and costing money, the day after a sale closes.
Corporate development is one more thing that likely has to be done by the CEO. However busy the CEO is, that task is too important to put off.
The day to start the process that might lead to a sale is the day it first occurs to the CEO that a product line or business might be better off with somebody else.