Divestiture of underperforming assets : a guide for privatisation?

This document argues that the experience of private corporations in the divestiture of unprofitable assets offers a close analogy to the problems of governmental privatization efforts. To explore this analogy, the author develops a hypothetical comparison between a small Third World country seeking to privatize its public busing enterprise and a manufacturer of high tech hardware seeking to divest itself of its unprofitable service and repair division. The comparison revolves around the need of both entities to: (1) understand the political and economic motivation behind privatization; (2) evaluate the profitability of the enterprise to be divested; (3) choose a divestment structure and a method of disposition; (4) structure the debt of divested/privatized enterprises in order to maximize leverage; (5) specify the conditions to be attached to the disposition in order to ensure that broader corporate or public policy interests are not jeopardized by the divestiture; and (6) assess the importance of third party (i.e., customer, supplier, and employee) relationships. The paper concludes by calling for additional research to identify those variables that can promote successful privatization in a variety of circumstances.