Only 41% of companies approach divestments strategically, despite benefits: EY report

Divestments take on greater strategic importance across sectors

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(Toronto, 29 January 2014) Only 41% of executives said that their strategic portfolio review drove their last divestment decision — despite the fact that 80% of companies that based divestment decisions on portfolio reviews experienced a higher valuation multiple in the remaining business, according to EY’s 2014 Global Corporate Divestment Study.

“Divestments are taking on greater strategic importance than ever before,” says Doug Jenkinson, Partner in EY’s Transaction Advisory Services practice. “Companies are beginning to better understand the long-term value and growth that strategic selling can create — it’s no longer about short-term gain.”

More than half of survey respondents have divested an asset in the past two years and yet opportunities to fully optimize value remain. Many are still leaving money on the table, adds Jenkinson.

“Companies that consistently conduct portfolio reviews and dedicate resources to make better informed decisions will be best positioned to act strategically, rather than opportunistically, and achieve the most successful divestments,” says Jenkinson.

Selling is an especially big focus for some sectors in the year ahead, including:

  • Consumer products: The main driver for divestments is an off-trend product (58%), followed by 44% who said reduced demand or market share would make them consider divesting.
  • Life sciences: This is expected to be the most active sector, with 41% expecting to divest in the next two years. Fifty-seven percent identified regulatory change as the main reason for selling.
  • Oil and gas: Sixty-three percent of oil and gas executives have divested over the last two years, primarily as a result of technologies such as horizontal drilling and hydraulic fracturing.
  • Power and utilities: Low growth was cited as the main reason for divestment by 49% of sector executives, with 57% saying they would reinvest in fast-growth areas, such as alternative energy.
  • Technology: Half of executives said the biggest trend prompting them to consider divestments is big data and analytics developments, followed by cloud computing innovations and mobile devices.

Divestments will be a vital part of the M&A story for 2014 — 33% of companies already have plans to divest in the next two years. Competition for assets may increase but so could competitive positioning among would-be sellers.

Within this changing deal economy, there will be even greater stakeholder scrutiny to ensure divestments are efficient and effective to extract maximum value and support the longer-term growth agenda of the business.

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