VIEWPOINT : Unlike Merger Mania, Divestment Has Mostly Positive Effect on the Economy : When Seller Frees Unwanted Assets, Buyer Is Often Able to Stimulate Creativity, Innovation and Growth

Consider some recent business transactions: Burroughs Corp. acquires Sperry; General Electric purchases RCA; Pantry Pride takes over Revlon; General Motors buys Electronic Data Systems and Hughes Tool Co.; Allied Corp. acquires Signal.

And another group of business events: Dart & Kraft split; Kroger sheds 100 of its 1,100 stores; Coca-Cola to sell its bottling subsidiary; Beatrice Foods pares food units and bottling subsidiary; RJR Nabisco announces the divestment of Kentucky Fried Chicken.

The amount of publicity given these two kinds of transactions varies remarkably. Mergers and acquisitions--group one items--carry huge headlines and appear frequently in newspapers and business journals. But corporate divestitures--the second list--are often tucked away in a few paragraphs in the back section of a publication.

The attention paid seems out of proportion to the consequences of the two kinds of transactions.

Divestitures are so closely linked to mergers as to be an integral part of the process of transferring and realigning resources. A substantial portion of the total impact of that process can be attributed to divestitures.

Effects of Mergers

But before looking in more detail at divestitures, consider the effects--positive and negative--of mergers:

Mergers and acquisitions often have a positive effect on both the companies involved and the business world. Mergers evoke synergy--efficiencies that allow two combined firms to produce more products, earn greater profits and generate higher stock prices than if they were separate. Acquisitions often upgrade earnings by promoting economies in production, marketing, administration, research, and application of new technologies.

Companies with moderate to serious problems, or weaknesses such as the lack of access to greater capital, may not only be salvaged but blossom when merged with healthy companies. True synergy contributes considerable benefits to the economy: better use of assets, elevated national income and tax revenue, possible gains in jobs and employment, more rapid growth, accelerated technological development and application, more stability, diminished operating risk and an enhanced position versus foreign competition.

Not surprisingly, President Reagan’s Council of Economic Advisers spoke highly of the national gains from mergers and acquisitions in a 1985 report, and urged that no new regulations be applied--not even to hostile mergers where the managements of the acquired entities do not agree to the transactions.

Consumers May Suffer

But mergers can have definite negative effects. They may create a monopoly or boost the surviving company’s market share to a degree that shrivels competition. Consumers may then suffer from inflated prices, impaired services and retarded innovation. Mergers also create big businesses that may resist orientation toward consumer welfare.

Another pitfall of acquisitions is that they often increase debt, making the organization more sensitive to financial adversity.

Corporate divestitures, on the other hand, are practically always advantageous to the economy, and usually to the divesting company as well.

The influence of divestitures on the economy is noteworthy. First, they restore economic and psychological balance amid the waves and turbulence of merger mania. And secondly, in their own right, they stimulate creativity, innovation, and economic growth.

Divesting firms sell only parts of their activities, most often entire divisions or subsidiaries, which normally continue as distinct, viable business units.

Often, executives of the subsidiaries arrange leveraged buyouts, using the assets of the units to be divested as backing for loans to buy them from the parent companies. And often, the new owners are able to take operations that their former corporate parents considered liabilities and turn them into resounding successes.

A case in point is Bumble Bee Seafoods, purchased from Castle & Cooke last year by a group of Bumble Bee managers and outside investors. Although it was a money-loser for Castle & Cooke, the newly independent company quickly moved to pare inefficient operations, install incentive programs and streamline management--and quickly became profitable.

Narrows Diversification

In addition to rectifying previous acquisition bloopers, dispossessions may be, among other things, strategic ways for corporations to narrow their areas of diversification.

Normally, corporations divest subsidiaries where the situation is unfavorable, and may view the occasion as an opportunity for future progress. A 1974 survey of several hundred companies found that the primary reasons for divestitures were poor performance, changes in objectives, excessive resource needs, constraints in operations, a need for funds and antitrust problems.

Divestments offer managements an opportunity to be creative, to rearrange and adjust their assets to accommodate market changes, to take advantage of new growth patterns, to implement new strategies, and to take advantage of shifts in managerial interests and expertise.

It is typical now for companies to expand and contract, to acquire and divest. Managements have enriched their standards of asset management, becoming both more efficient and effective.

Companies have universally followed massive restructuring programs since the devastating recession of 1980-82. They have cut costs, emphasized divestments, become lean and resource-minded, generally remained profitable and many have survived despite fierce domestic and foreign competition. The national economy has retained its strength and vigor because of these programs. Divestitures rank some front page coverage, not to ballyhoo the gaffes that corporate executives may have made, but to herald their thrusts toward fresh triumphs.