New approaches to divesting are required to secure value at a time of economic volatility
Brussels, 23 March 2009 – Unprecedented economic volatility means that the ‘accepted’ divestment norms no longer apply, according to a new Ernst & Young report. Companies now need to think more creatively, prepare more carefully, act more decisively and with greater flexibility to ensure their deals are successful – and all within a timeframe over which they have little control. Divesting in turbulent times: Achieving value in a buyer’s market, is the first global survey of its kind, conducted with 360 c-suite level executives at companies across the world, with an annual turnover of $1bn+.
The survey reveals that more than half of deal doers (53%) confirm they are more likely to consider divestments due to current economic events. Respondents expect deals to be more sophisticated in process and structure, with increasingly complex demands. While the survey finds a sizeable minority (23%) looking for cash – to bolster the balance sheet, fund acquisitions or pay down debt – almost half (48%) are more likely to consider a range of innovative structures at a time when divesting 100% of their businesses for cash may be difficult to achieve.
Pip McCrostie, Global Vice Chair, Transactions Advisory Services at Ernst & Young, says:
“In the pre-crunch years, 100% sales for cash at closing have been the norm but this is no longer the case. While a higher percentage of companies are considering divestments, frozen debt markets give them little option but to welcome alternatives to cash sales and more innovative deal structures.
“Sellers are also finding they need to pursue multiple divestment options, simultaneously, in order to have the greatest chance of achieving their objectives. Overall, corporates will need to increasingly deploy portfolio management techniques long practiced by private equity to secure the most value.”
Who’s buying?
We are firmly in a buyers’ market and the range of buyers has expanded to include companies in emerging markets, sovereign wealth funds and governments. Their needs have become more varied, adding further complex demands.
“Buyers with cash have a rare opportunity to acquire businesses that would not normally be sold at current valuations,” continues McCrostie. “Companies with strong balance sheets are likely to strike attractive deals. For deals to succeed buyers and sellers will have to work much more closely together to close transactions. Buyers have the stronger hand, so sellers must focus on the different requirements of buyers in order to convince their skeptical investors about the merits of a deal, customizing the ‘for sale’ offering for each prospective bidder.”
Preparation drives value
Only about one-third (36%) believed their recent divestments had met expectations. 62% cited ‘lack of time’ to prepare for divestments as the biggest obstacle to successful divestment. Historically, almost two-thirds considered at least six months necessary to successfully execute a deal – a timeframe that might not always be available in today’s economic climate. Companies in exceptional circumstances may have little option but to sell quickly, possibly at reduced valuations.
“Taking time to prepare a business for sale is more important than ever today, however, the economic environment is forcing many companies to undertake an accelerated divestment. Companies must maintain a heightened state of readiness right across their portfolios and be prepared to exit all or parts of their business at very short notice. Vulnerable companies may need to prepare themselves to be ready to execute in as little as 10 days in some cases – any additional time available will be a welcome luxury,” says McCrostie. “Whether you are a buyer or a seller, proactive portfolio management based on comprehensive information will give added flexibility. Divestments will not yield the value they once did, but the best defense against that shift is preparation.”
Other key findings
· In financial services, 61% of respondents reported that market conditions make them more likely to consider divestments and 55% report they are more likely to consider multiple divestment options in today’s environment – both more than the survey average. With transaction sizes for financial services companies often extremely large, cash deals are especially difficult to finance.
· 23% of respondents anticipate emerging market buyers will be their main acquirers of assets in the next two years, against just 11% saying they were their main acquirers in the past two.
· While only 2% of respondents said sovereign wealth funds had been their main buyers in the past two years, 7% expect them to be in the next two. By contrast, 12% expect private equity to be their buyers in the next two years, compared to 16% as buyers two years ago.
About the report
Ernst & Young’s global divestment survey 2009 is based on both a quantitative survey of senior executives of large companies and a series of face-to-face interviews. The survey was conducted in November and December 2008. The Economist Intelligence Unit conducted the quantitative survey, contacting a total of 360 senior vice presidents and C-suite executives at companies with revenues of more than $1 billion. There was a broad sector representation (financial services accounted for 33% of respondents, which has been allowed for in the findings).
