Strategic Divestment Activity Expected to Increase in Next Two Years Due to Slow Economic Recovery
New York, 16 January 2013 - According to a new survey from Ernst & Young, companies are increasingly refocusing on divestitures with more than three-quarters of respondents saying that they intend to accelerate their divestment strategy over the next two years. This is a marked change from the past two years, when nearly 50% of divestments were driven by a need for a quick cash injection rather than a longer-term strategic objective.
The 2012 Global Corporate Divestment Survey reveals that respondents’ rationale for a divestment is often focused on short-term financial motives rather than the longer term strategic benefit for the business.
Six out of ten respondents say the main factor that determines whether a business stays within a company portfolio or not is 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.
“In the past few years many companies have looked to divestments to off-set cash and credit difficulties and to drive shareholder value as the sum of the parts are greater than the whole,” says Paul Hammes, Ernst & Young LLP’s Americas Leader for Divestiture Advisory Services. “This short-term thinking is shifting however as companies plan for the long-term and take a more strategic approach to divestitures.”
“Companies that divest strategically tend to exceed their value goals. According to the survey, 73% of companies that divest leave money on the buyer’s table further highlighting 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. However, more than half of those selling assets are not presenting their divestments as attractively as they could to the broadest range of potential buyers. As a result they are not maximizing the value of their divestments.
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.
“In today’s market buyers are savvier than ever, so corporate sellers need to view themselves as the buyer would in order to present the most compelling case for the deal. It is crucial that sellers enhance the value story of their divestments and tailor them to the full range of potential acquirers,” continues Hammes.
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 pursuing 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.
“Many companies have been taking a ‘wait and see’ approach to deal-making in the last few years as economic uncertainty persists, and this approach may be here for a while as a prolonged weak economic outlook continues. However, according to our research, many companies may be missing out on growth and value opportunities by postponing divestment plans,” says Hammes.
Supporting this view, 40% of companies 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 divestments, 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 assets. 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.
“Companies looking to divest may increase value by appealing to buyers in a range of sectors and markets around world, including private equity,” says Hammes.
Employee engagement ensures long-term divestment viability
The most successful divestitures are those that focus on employee engagement and retention, according to Ernst & Young’s Human Capital Carveout Study, which surveyed more than 100 executives experienced in global corporate divestitures to determine how their human capital initiatives impact their deal success. The report found that 85% of survey respondents say that employee retention is the biggest driver of carve-out success.
“Before the deal is signed corporate buyers and sellers must consider the long-term value of the deal from a people perspective as well and our research and experience has found that those companies that focus on employee communication and retention are the most likely to translate to long-term value,” continues Hammes.
The sold standard: golden rules for any sale
The Global Corporate Divestment Survey highlights principles and practices that will help ensure a successful divestment.
Hammes concludes: “Those companies that focus on consistent and strategic practices including: widening the net, standing in the buyers shoes and having a long-term value perspective will be most likely to achieve divestment success.”
Notes to Editors
Ernst & Young’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.
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