Eighty percent of executives that based divestment decisions on a strategic portfolio review saw an increase in value, according to a new report from EY
New York, 20 January 2014
Of companies that divested, 88% left money on the table
Eighty percent of executives that based divestment decisions on a strategic portfolio review saw an increase in value, according to a new report from EY. The annual 2014 Global Corporate Divestment Survey, which surveyed more than 700 corporate executives globally, also reveals that 88% of companies left money on the table, at a time when no company can afford to lose deal value.
In terms of options, 55% of global executives would consider a full sale of their business compared to 34% who would opt for a carve-out and 14% an IPO.
“We’re seeing more interest in divestiture activity both globally and in the Americas,” said Paul Hammes, EY Global and Americas Divestiture Advisory Services Leader Transaction Advisory Services. “After hunkering down for a long period of uncertainty, more executives feel ready to make strategic choices that focus on strengthening companies’ core offerings and ensuring long-term growth.”
Survey Reveals 3 Leading Practices:
EY’s survey results revealed three best practices to consider when undertaking a divestiture:
First, companies must know their core business. By assessing core competencies, redefining the operating model and understanding differentiators, companies improve investment focus. 85% of respondents saw an increased valuation multiple in the remaining business by basing the divestment on an updated definition of core operations.
Second, make better-informed decisions. This happens when senior management leads portfolio reviews and diversely skilled teams analyze robust business unit performance and industry benchmarks. Executives believe that improved industry benchmarks (45%) and better business unit data (39%) would increase portfolio review efficacy.
Third, act strategically. Divestments are strategic tools. When companies think of them as such and act on portfolio-review findings, it increases valuation multiples post-sale. Fifty three percent of executives believe portfolio reviews would be more valuable if companies dedicated resources to act on review results.
“These leading practices might seem obvious, however, it is surprising how many companies do not consider all of these when doing a divestiture -- causing them to leave money on the table and miss out on full value of the deal,” said Hammes.
Drivers for Divestment in Key Sectors
As with all aspects of M&A, different factors drive divestment activity across industries. Life Sciences should be the most active divesting sector, with 41% of companies expecting to sell in the next two years – the main reason being regulatory change.
The key driver for divestments in Consumer Products is off-trend products (58%), followed by 44% who said reduced demand or market share would make them consider divesting.
In the fast moving Tech sector, half of executives said the biggest trend prompting them to consider divestments is big data and analytics developments, followed by cloud innovations and mobile as companies re-evaluate their core business and competitive positions.
Why Divest Now?
Divesting business units that are no longer strategically aligned with companies’ core offering allows management to reallocate capital to higher-growth areas, and helps them create a more focused, better defined organization that investors value.
“We live with continuous change,” added Hammes. “Whether it is technological innovation, shifting consumer demands or increased investor scrutiny, companies need to be proactive in actively managing their business portfolios, effectively allocating capital, meeting market needs, and driving long-term growth as no company can afford to lose value.”
Planned divestments and the M&A story for 2014
The divestment plans of global executives will be a vital part of a developing M&A story for 2014. January could see the highest value recorded in the first month of the year in some time with three US$10b+ megadeals already announced in US, we are seeing a very robust start to 2014.
“Given some of the recent merger activity I think we may be in the initial phases of an M&A uptick,” concluded Rich Jeanneret, Americas Vice Chair of Transaction Advisory Services (TAS) at EY. “Executives are continuing to proceed cautiously and are making fewer big bets than in the past. Ultimately the level of merger activity in the coming year will be determined by the degree of confidence in the macroeconomic environment and political stability.”
Notes to Editors
About the survey
The EY Global Corporate Divestment Study analyzes leading portfolio review and divestment strategies and provides insights around a central thesis: Strategic portfolio management leads to improved divestment outcomes. Results are based on 720 interviews with corporate executives surveyed over September and October 2013 by FT Remark, the research and publishing arm of the Financial Times Group.
The survey includes respondents from the Americas, Asia Pacific, Europe, the Middle East and Africa. While a broad range of industries is included, the study focuses on five key sectors: consumer products, life sciences, oil and gas, power and utilities and technology. Respondents stated that they have direct knowledge of or hands-on experience with their company’s portfolio review and divestment activity.
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