Global Corporate Divestment Study
Three leading practices to improve your divestment strategy
1. Know your core business
Company leadership needs to assess their core business regularly and understand what differentiates the company from competitors.
Define the core
Three key activities can help companies validate their core competencies.
- Meet regularly: Internal “pulse checks” with sales teams and client-facing staff will provide insights into which products and services are best received in the market.
- Analyze rigorously: Formal analysis of the business’s products allows companies to better understand how they are performing on pricing, volume changes, customer satisfaction and market share. It also helps identify new trends that may impact the business and find ways of capturing market share from rivals. For example, how are your pricing trends similar to or different from the market? How does your pricing and market share compare with your three to six core competitors? How is share changing and why?
- Look outside: External verification with third parties can shed further light on changing market dynamics and the extent to which core products/businesses are resonating in those markets.
Q: When was the last time your company redefined its “core“ operations?
Review strategy regularly
Companies need to revisit their strategy as market conditions change. Of the companies that has redefined their core operations in the last two years, 85% said their last divestment had a positive impact on valuation multiples of the remaining business. This compares to only 65% of executives working with a core operations model that is more than five years old.
Involve senior leaders early
Surprisingly, many companies fail to include senior management early enough in the process to optimize portfolio review results. Only 52% of executives said their executive board is involved in setting portfolio review goals.
2. Make better-informed decisions
Companies need the right infrastructure to make effective portfolio decisions: dedicated teams with a diverse skill set and both comprehensive and accurate data.
Build the right team
Nearly half of executive believe a dedicated team would improve their portfolio review process.
The most successful teams are led by an executive with the authority to make decisions and recruit the appropriate professionals with diverse skill sets, including:
- Strategic: Can analyze industrial, financial and organizational information; potential candidates would be directors or vice presidents from corporate development or strategy.
- Financial: Work on modeling, pro forma earnings, business case development and strategic options analysis.
- Organizational understanding: Well-informed on the overall business, its operations and the “pulse”of the markets.
- Sales: A senior sales executive can offer a direct customer perspective.
- External advisors: Where appropriate, can provide additional operational, strategic or sector insight.
Run the right analytics
There is a clear need for improvement in data quality in many companies.
- Nearly half (45%) of executives would like to see better industry benchmarks.
- 39% cite the need for more robust business unit data to enhance their portfolio review process.
- Only 13% of companies allocate inter-company costs based on actual usage. Most companies potentially distort the historical cost structure when buyers are looking for a stand-alone view of the business.
- Just a fifth of executives have an accurate picture of working capital for each business unit that is being considered for divestment, which is surprising given the number of purchase price adjustment mechanisms that are based on working capital.
3. Take action
Companies need to act strategically rather than opportunistically when divesting. And they need to act when a portfolio review considers a business non-complementary to the portfolio.
Define criteria to drive strategic rationale
By monitoring key financial and operational metrics continuously, companies can determine potential divestments strategically rather than opportunistically.
Many companies still rely heavily on opportunistic divestments, either selling because they were approached by a buyer or because they needed fast cash. Twenty percent of companies indicated they would divest opportunistically.
Q: What is the rationale for your divestments?
Use frequent reviews to create opportunity
Divesting for long-term growth requires an ongoing portfolio review process. Two-fifths of executives who conduct reviews twice a year registered a very positive impact on their company’s valuation multiples after their last divestment.
Decisive action maximizes value
Portfolio reviews may identify changes that need to be made, but too often companies fail to dedicate the effort and resources required to turn analysis into action.
- 53% of executives said there needed to be more of a link between review results and action.
- Just 27% said a business found to be non-core was very likely to be sold. This group of high performers rate their review process as more effective and make divestments that are better received by investors.