Innovation, information and analytics drive divestment success
Rapid innovation in technology and heightened activist investor moves made big headlines this year while the Internet of Things (IoT) and data storage drove huge deals. Major trends in the tech industry included cloud delivery services, gamification, location-based services and digital security. Further, as activist investors continue to focus on technology stocks, companies must be prepared for any tactics that activists may deploy to exert influence on their strategic, financial and operational approach.
Our study found that technology companies often take a reactive approach to divestment opportunities. More than half of the companies told us that they held on to assets too long, mostly because they did not properly analyze the valuation of each business unit. To maintain maximum value for shareholders, companies must closely monitor the relevant metrics investors use to evaluate financial and operating performance. Tech companies should consider looking at themselves almost with an activist lens, to truly “stress-test” their strategies.
Technology companies need to develop a plan of attack that addresses a variety of market scenarios to effectively take control of their corporate strategy — before someone else does it for them. The outcome for some more mature players may be consolidation in the quest for profitability — if they have sticky revenues and customer bases, rapid growth may be neither possible nor desirable. Others may opt to go private, taking value off the table and transforming themselves away from the public glare and quarterly reporting pressures. The third option, of course, is to divest sluggish businesses to focus on more attractive growth opportunities. All three alternatives will result in divestment and, therefore, each will require top-notch divestment processes and decision-making.
The discrepancy in the level of preparedness for activists indicates there may be a disconnect between what technology companies are doing to prepare and what needs to be done to be highly effective in fending off an activist threat.
Q: How prepared is your business for shareholder activism?
Addressing the activist challenge effectively starts with management buy-in — recognizing and adopting the mind-set that portfolio review and defending against activists are a priority. From there, companies can work to implement a cohesive process for defensive maneuvering, such as establishing a schedule and structure for regular portfolio reviews.
Pressure from shareholders is reflected in the technology industry responses of our Global Corporate Divestment Study. Valuation consideration was the most important trend in motivating technology companies to consider a divestment, mentioned as first or second choice by 60%. This was closely followed by rapid change and innovation in the industry, cited first or second by 58% of technology executives.
However, our study demonstrates that too many technology companies are taking a reactive — rather than proactive — stance to making divestments. Half (51%) said that their most recent divestment was triggered by opportunistic factors.
Q: Which key technology sector trends have motivated you to consider a divestment?
Portfolio reviews need to move up the list of priorities if technology companies are to keep pace with rapid change and are to improve valuations by divesting underperforming and non-core units before those businesses become more of a liability than an asset.
However, many companies face two key challenges by considering portfolio reviews less important than other business activities. First, companies are not reviewing their portfolios frequently enough to make timely decisions. Half of technology company executives said they conducted their reviews annually, while just 7% did so on a quarterly basis. In our results across sectors, we found that those conducting reviews on a quarterly basis had a much higher success rate in their divestments than those who reviewed less frequently.
Q: What key challenges do you face in implementing findings from portfolio reviews?
Effective portfolio review processes rely on the right information being available and the right tools being used to analyze vast volumes of data. Yet over three-quarters (79%) of technology respondents said that poor data made it difficult for them to use analytics effectively in divestment decision-making. This ties in with the finding that two-thirds of technology respondents had access to only segment-level information (generally more than 20% of revenue) when seeking to make divestment decisions rather than business unit or sub-business unit data. Our findings suggest that many technology companies lack sufficient granularity in their data to clearly understand how individual business units are performing, which has resulted in the inability to respond to divestment opportunities.
Q: What level of information/data is available to your organization to make divestment decisions?
More accurate and detailed data would increase the efficiency of portfolio reviews. That would improve divestment decisions by providing visibility on performance. To improve data and analytics quality, companies should:
- Review which metrics are being used. Key performance indicators need to be aligned to the portfolio and the company’s strategic aims. However, they should also be adjusted according to individual business units — for example, those operating in fast-growing segments should be different from those in more mature markets.
- Ensure sufficient data granularity. Data should be collected at least at the business unit level so that a proper assessment of the unit’s performance can be made.
- Make the most of big data and predictive analytics. The advances made in these technologies are potentially game-changing, but they require continual and ongoing investment in both systems and the staff using them.
- Consider hiring in outside help. Putting in the right processes and systems takes resources and time — a luxury many technology companies don’t have. Outside expertise can speed up the process of getting the right data into the right analytical tools.
- Conduct virtual divestments. With the right data and systems in place, it is possible to model the effect a divestment would have on the parent and other business units, allowing companies to generate more divestment value through effective business separation activities.
Intellectual property (IP) is at the heart of technology companies, often shared among business units, services, products and markets. Divestments are often stalled or rejected because the parent does not want to lose valuable IP or because untangling the complexities of IP ownership following divestment can put a brake on decisive action. So it is perhaps unsurprising that IP issues are the top challenge to divestment in the sector, mentioned by 59% of respondents.
Yet IP issues do not need to be a barrier to successful divestment. Companies should:
- Conduct IP inventory on a regular basis. Divestitures can be more straightforward if companies understand what IP lies within their business units, what interrelationships and dependencies the IP has and what its value is to each unit, product or market.
- Consider the options before launching divestment. Armed with detailed and up-to-date information, companies should consider which workarounds suit their IP needs best if outright sale is not the right outcome.
- Don’t wait to discuss IP. IP negotiations tend to happen after business and operation discussions. Presenting IP solutions early on will help avoid costly delays.
39% of technology companies say they are only moderately prepared for activist threats, and a worrying 17% are not prepared at all.
Disruption is a constant in the technology industry. So today’s strategy and portfolio of businesses may not make sense tomorrow. Nimble and disruptive new players continually emerge to take market share from more mature players that fail to innovate. To avoid this fate, technology companies must become far more agile. And agility demands focus on core areas, the right systems and processes to make effective decisions and then rapid divestment decisions once underperforming assets are identified.