Short-term "fast cash” more of a priority for sellers than longer term strategic priorities
- Strategic drivers such as enhancing shareholder value or focusing on core business given less priority than "fast cash”
- 73% of companies that divest leave money on the buyer’s table
- 77% to accelerate divestment plans, 46% plan to divest within two years
London, 17 January 2013 – Nearly 50% of divestments in the past two years were driven by a need for a quick cash injection rather than to achieve a longer term strategic objective, according to a new report from EY.
The 2012 Global Corporate Divestment Survey1 reveals that respondents’ rationale for a divestment is often focused on short-term financial motives rather than the longer term strategic benefit of the business.
ix out of ten respondents say the main factor that determines whether a business stays within a company portfolio or not are short-term financial measures. For example, whether an asset dilutes or enhances earnings per share (EPS), and how it performs against financial benchmarks such as return on capital employed (ROCE). Strategic drivers such as enhancing shareholder value or focusing on core business, come further down the priority list.
The survey, conducted by the Economist Intelligence Unit (EIU), is based on feedback from 600 senior corporate executives globally, as well as a series of interviews with clients, investment banks and law firms.
Pip McCrostie, Global Vice Chair Transaction Advisory Services, at EY comments:
“The rationale for making divestments is shifting. Many companies are still using divestments as a short-term tool to raise cash or pay down debt. That’s not surprising given the difficulties many businesses have faced in terms of cash and credit over the past five years.
“However, some companies are now taking a more strategic and structured approach, viewing a divestment as strategically important as an acquisition.
“Those that divest strategically tend to exceed their value goals. The fact that 73% of companies that divest leave money on the buyer’s table will increasingly highlight the benefits of a more strategic approach. In this prolonged period of low – or even zero – growth, divestments will likely play a more important role in how companies navigate uncertainty, meet their strategic corporate objectives and create value for their stakeholders.”
Are businesses telling the full value story?
Fewer than 50% of businesses say that they are carrying out all of the key steps required to enhance the value story of their divestments. Forty-six percent of global corporations are in the process of, or are planning to divest in the next two years and nearly 77% plan to accelerate their divestment plan over the same period., However more than half of those selling assets are not presenting their divestment as attractively as they could to the broadest range of potential buyers. As a result they are not maximising the value of their divestment.
Essential steps such as validating the market/product/growth story with independent review (50% respondents), developing an M&A plan for potential investors (45%) and providing their own view of synergy opportunities in the information provided to buyers (43%) are being carried out by a minority of those businesses divesting.
McCrostie adds: “Corporate sellers benefit by enhancing the value story of their divestments and tailoring them to the full range of potential acquirers. Today, buyers are more astute than ever, so sellers need to present their case in the most appealing way possible.”
A "wait and see" approach could prove costly
More than half of respondents said they would ramp up their divestment activities if economic growth improved, but there are differences between regions: 65% of respondents from Asia-Pacific say that they would increase their divestment activity but are holding back due to economic conditions, compared with 60% from the Americas and 51% from the EMEA region.
Overall, many companies have chosen to prioritize operational improvements, cutting costs and increasing efficiency over divestments in recent years, waiting for the economy to recover. However, the regional disparities may indicate that western developed market companies have become better accustomed to macro-economic growth challenges – having managed uncertainty for longer– and are now more willing to divest despite the economic environment.
McCrostie says: “The challenging business environment is with us for the foreseeable future. In that context, a "wait and see" approach to conducting any transaction is understandable. However, our research provides strong evidence that companies may be missing out by delaying divestments due to weak economic conditions.”
Supporting this view, 40% said a high degree of competition in the M&A process helped drive up values.
Rigorous portfolio management and a broader buyer base maximize success
When asked about their most recent divestment, only a fifth of companies overall exceeded their expectations. Respondents with structured processes were more likely to have achieved strategic goals: 55% divested ahead of time and exceeded price expectations. Of those divesting without structured processes, only 34% met those expectations.
Sellers are also not always considering the full range of potential acquirers for their asset. Only a third of potential sellers consider overseas buyers in the same sector while just a fifth look to domestic buyers in a different sector. Only 13% consider an overseas buyer in a different sector to be the most likely acquirer.
Corporate sellers could also benefit by looking beyond corporate buyers – for instance, only 3% consider private equity a likely acquirer. McCrostie says: “Potential sellers maximize value when they make the asset attractive to a wide range of international buyers across a broad range of sectors, including private equity.”
The sold standard: golden rules for any sale
The survey highlights principles and practices that will help ensure a successful divestment.
McCrostie concludes: “For the first time we have empirical evidence that businesses which adopt strategic practices will extract greater value from a sale. Companies which exceeded their most recent divestment expectations in terms of timing and pricing were characterized by consistent practices: they widened the net, stood in the buyers shoes and had robust processes in place.”
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1. EY’s 2012 Global Corporate Divestment Study reveals five leading practices that sellers should focus on to maximize divestment success:
Conduct structured and regular portfolio management: The respondents that have structured processes are more likely to have achieved strategic goals:
Consider the full range of potential buyers: Appealing to a full range of buyers, including strategic and financial, domestic and overseas, can create strong interest for an asset and realize a price that exceeds expectations.
Articulate a compelling value and growth story for each buyer: Buyers are more circumspect about the growth potential of businesses being offered for sale. Few sellers articulate a strong value and growth story from the perspective of the most likely buyers of their businesses.
Prepare rigorously for the divestment process: Select changes to the preparation process could have made a material difference to value. Examples include protocols for information sharing and confidentiality, engagement with target management and investment by senior team members.
Understand the importance of separation planning: A clear separation roadmap is identified by more than half of respondents as the most increasingly complex aspect of divestment. Other challenging areas include negotiating transition services agreements (TSAs), estimating standalone costs, tax planning and decisions regarding the completion mechanism. Buyers that do not fully understand these factors perceive greater risk, which is often reflected in their offering price.