Idea in Brief
The Problem
Large public corporations frequently off-load business units they believe are underperforming—only to see the private equity firms that buy the units reap a handsome profit by turning them around and selling them.
Why It Happens
Managers at large corporations are wedded to a valuation model anchored in the amount of cash invested in a business rather than in expectations of value to be created. PE firms can exploit this serious misvaluation.
The Solution
Managers should recognize that any investment in an asset presupposes that value will be created or destroyed in the future—and that should immediately be reflected in the valuation of the capital represented in the asset.
In 2013 Ellen Kullman, then the CEO of the chemicals giant DuPont and under pressure from shareholders to improve results, decided to sell the company’s performance coatings business, a low-growth, low-profit part of the portfolio. Carlyle Group, a private equity firm, paid $1.35 billion to gain full ownership of the business and renamed it Axalta. Carlyle immediately embarked on a major overhaul of the unit, which involved fairly aggressive investment, especially in developing markets.
