Asia corporates warm up to divestments
Interest in corporate asset sales is on the rise across the Asia-Pacific (APAC), fueled in part by a rapidly changing business landscape. More than one-third of all regional firms report plans to divest within the next two years, up from just 15% in 2014.
As more firms consider divestments, their rationale is also evolving. Our research shows corporates are increasingly weighing the external disruptive risks in addition to the internal strategic issues, when analyzing potential portfolio divestment strategies.
- External triggers to a divestment decision: 56% macroeconomic and 53% technology
There is, of course, no single formula for the perfect divestment. But our research and portfolio analytics reveal a number of leading practices prevalent to support both global and regional divestment decisions.
Divestment is an increasingly mainstream capital management tool in Asia – which, in part, reflects recent success: 87% of APAC firms told us their last divestment met or exceeded the expected impact on the value of the remaining business, while 86% said they achieved a price that met or exceeded expectations. But firms must also consider why it is they choose to divest in the first place.
Our studies show that nearly half (47%) of all respondents reported that unsolicited bids or opportunistic sales influenced their decision to sell off an asset, and for 30%, it was the main reason.
On the other hand, a nearly equal number (46%) reported a more tactical approach – with deals engineered in advance to divest specific underperforming assets or those in a weak competititive position. Unsurprisingly, changes in technology and digital capabilities are becoming a bigger part of the portfolio consideration.
A marked rise in global geopolitical uncertainty (from Brexit to capital controls) has also raised concerns for some asset owners – especially in EMEA. In contrast, those in APAC firms showed far less concern about the impact of geopolitical uncertainty; it was cited as a factor for just 22% of regional divestments.
APAC respondents were seen as marginally less likely to consider macroeconomic uncertainty when making divestment decisions while compared with global peers. This tolerance of short-term uncertainty and a patience in seeking higher deal values may help explain why APAC respondents reported the postitive outcome of their divestments.
“Transformative decisions are most successful when made with clear long-term goals in mind — rather than reacting to short-term factors like geopolitics or macro uncertainty. APAC firms are ahead of their global peers in this respect, though we do counsel a more disciplined view of technological-based change and disruption to future-proof the divestment deal pipeline.“
Stephen Lomas, Global Divestment Leader, Asia-Pacific
Beneath the macroeconomic picture lies a truth that finding growth in the region has simply become more challenging. Sixty-eight percent of APAC firms said they exited underperforming markets to focus on more profitable segments.
Our recent HBR article Asia: is it time to refocus? highlights that the days of pursuing land-grab strategies in Asia are long gone. Companies are now searching for depth over breadth, and are willing to shed undeperforming non-strategic or regulatory-constrained assets.
“Some companies are simply not achieving the growth they initially anticipated in region. They find themselves competing with strong local players – locking up precious capital and human talent to feed a slow-growing business with few prospects of achieving scale. Many are asking themselves – can the capital needed to operate this business be better deployed into other markets, new technologies or returned to shareholders?”
Stephen Lomas, EY’s Asia-Pacific Divestment Leader, Transaction Advisory Services
Risks and opportunities related to technological change (69%) are a growing divestment trigger. As more companies look to future-proof their business, they are increasingly considering divesting assets that no longer fit with their core.
With the entire industry-wide value chains facing disruption and innovation, digital transformation is growing as an organizational priority. For many firms, legacy divestments don’t just consist of selling off ageing, non-strategic assets. It’s also a means of raising capital to seed important new digital and technological growth.
Emerging tech changes like cloud computing, SaaS and AI are disrupting old business models across the tech too. Technology firms themselves are increasingly open to divestment activity, with many shedding slow-growing hardware assets or nonaligned units. There are barriers here though – 80% of tech executives cite IP issues as a major challenge to successful divestment.
This may explain revived interest in financial and organizational strategies that involve partial ownership. Three out of four executives said they were open to deals structured as JVs or alliances, allowing a continued interest in the IP and profits of whatever they sold off.
Driving better outcomes for divestments
Our respondents cited three clear priorities for driving better outcomes when planning and executing divestments:
1 Think about the tax upside for both parties in a divestments
With widespread flux in tax laws across the world, reviewing the historical tax advice and building a tax model highlighting possible tax efficiencies and incentives will be highly valued by buyers.
2 Look through the eyes of a buyer
Build a value creation roadmap including synergies, opportunites to remove costs, improve supply chains or expand offerings of customer base.
3 Take a data-driven analytical approach to divestments
This will enable companies to generate quality interest for assets. It also means they will be better prepared and can act more quickly to meet the demands of technological and macro-economic disruption.
About the study
The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business amid massive market disruptions. The 2017 study results are based on more than 900 interviews with corporate executives, including 285 from the APAC, between October and December 2016, all of whom have completed at least one divestment in the last three years. The research was conducted by FT Remark, the research and publishing arm of the Financial Times Group.