Global corporate divestment study
Global M&A volumes have significantly declined from pre-crisis years. In 2012, total deal value was an estimated US$2.25 trillion, a drop of 47% from 2007, and 12% lower than 2011.
Volumes also fell 21% between 2007 and 2012.1 Macroeconomic concerns, including US debt levels, tax increases and the ongoing Eurozone crisis, now weigh heavily on corporate buyers' minds. This has reduced appetites for large transformational deals, with many companies adopting a "wait-and- see" approach.
Until now, the economic environment has also dampened appetites among sellers. In the immediate wake of the financial crisis, many observers predicted a wave of divestments as companies sought to free up cash, repair balance sheets and cure debt covenant violations.
For the most part, this didn't materialize as many companies waited for improved economic growth. However, we seem to be entering a period of prolonged low growth.
"The number of acquisition opportunities available to strategic and financial buyers is low, so when they come up for sale they inevitably attract a lot of interest and often sell for high multiples."– Paul Hammes, Americas, Ernst & Young
Why companies shouldn't "wait and see"
Many companies that have pursued divestments have achieved the value they sought. With M&A volumes down, there is often strong competition for a limited supply of good assets. Forty percent of study respondents stated that buyer competition helped drive up divestment values.
An executive from an industrial products company told us that postponing a sale to await a more buoyant market may be the wrong decision. "You always wonder whether holding onto an asset a little longer would have enabled you to grow it or even achieve a higher valuation," he said.
"But you really have to weigh that against the opportunity costs of having monetized the asset for other purposes. In addition, if that asset is already attracting less capital as part of the resource allocation process, then it will be difficult to fund any kind of growth."
Growing appetite for divestments
Companies are refocusing on divestments. Our study finds a growing appetite among corporates to divest assets, with more than three-quarters of respondents saying that they intend to accelerate their divestment strategy over the next two years.
Sectors most likely to divest include power and utilities, and consumer products.
For many, though, the economic environment remains a concern. More than half of respondents said that they would ramp up divestments but were concerned about the impact of weak economic conditions. Many were concerned that unexpected events could cause buyers to renegotiate or terminate a deal.
A challenging divestment environment
With buyers and sellers facing significant uncertainty, there is an understandable emphasis on rigorous preparation,due diligence and reassuring external stakeholders about the rationale for the divestment.
Almost half of respondents said that the level of stakeholder scrutiny on both the buy side and sell side has increased.
For many, this scrutiny has increased the time, resources and preparation required to successfully complete a divestment. But spending more time on divestments when so many other priorities are clamoring for attention can be a real challenge.
1 Source: Thomson Reuters