How can divesting fuel your future growth?

Global Corporate Divestment Study 2018:
A spotlight on Europe

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Companies are facing intense pressure to evolve their business models to remain competitive and keep pace with rapid technological change. At the same time, they must continue to navigate macroeconomic and geopolitical issues such as Brexit, changes in tax policy, and evolving labor and immigration laws. Against this challenging background, divestments are more than ever core to corporate growth and transformation.

Nine out of 10 European companies (90%) surveyed plan to divest within the next two years (75% within the next 12 months) — a notably higher number than the 51% in our 2017 study and a further 3% above the global level.

  • Evaluate what, where and when to divest

    Despite continued geopolitical challenges, for most Europe-based companies the motivation to divest is increasing competition and disruptive technology. Even though 52% name geopolitical uncertainty and macroeconomic volatility as triggers for their latest divestment, this is down from 62% and 69%, respectively, in 2017 when these were the major driver.

    More than three-quarters (77%) of European executives agree that the changing technology landscape is directly influencing their divestment plans, up from 50% in 2017. Companies are recognizing that some of their underperforming businesses, in need of further investment, are no longer core to the growth strategy. In fact, a unit’s weak position in its marketplace being reported by 87% of executives as this year’s top divestment trigger, up from 57% in 2017.

    Divesting to focus on top-performing assets and investment in technology can provide an essential competitive edge, a fact that opportunist buyers are focusing in on with approaches and unsolicited bids increasing from 36% to 73% in the last year.

    With businesses looking at premium prices, now is the time to divest. While valuations are above historic averages across most markets, the combination of higher global economic growth and the added impetus of US Tax reform may hold them at elevated levels in the near term. However, the anticipated rate hikes in the US, and UK, and then in the Eurozone, make this an ideal time for companies to consider divestments to unlock enhanced value that can be recycled and reinvested.

    These factors make companies more open to opportunistic approaches — of which they should be cautious, due to likeliness of weaker performance.

  • Conduct portfolio reviews with a readiness to act

    In today’s fast-moving market, companies’ portfolio review process must prepare them for immediate action – whether for a planned divestment, an opportunistic offer or another necessary capital allocation.

    Companies that conduct portfolio reviews annually are twice as likely to exceed performance expectations for divesting “at the right time.” However, many businesses act too slowly: more than half of European executives say they held onto assets too long. This may be because 71% of companies — up from 55% in 2017 — find it challenging to make the portfolio review process a strategic imperative.

    This suggests many need a more formalized approach. In 2018, almost double the level of respondents, 62%, compared with 35% in 2017, also encountered difficulty in overcoming emotional attachment to an asset, or conflicts of interest in portfolio reviews.

  • Lead with a data-driven story

    With regular portfolio reviews now the norm, the review process should become a real-time activity that captures the increasing amount of additional external data available. Timely and frequent feedback through a decision analytics platform that transforms data into insight is crucial. Ideally, this “always on” approach should be results-driven, with the ability to manage tactics throughout each phase of portfolio optimization.

    Almost three-quarters (71%) of European sellers expect to make greater use of prescriptive analytics for portfolio decisions over the next two years, up from 37% in 2017. Those that do are 76% likelier to achieve a higher than expected sale price.

    Social media is also playing an increasing role, revealing market sentiment, stakeholder perceptions and trends not always evident from internal data. More than half (55%) of Europe-based companies expect to use social media analytics more in the future — nearly triple the 2017 figure (19%). But just 11% think their financial modeling capabilities are effective; a sharp decline from 2017’s figure of 33% and in line with company plans to reduce financial modeling within two years (27%, compared with 9% in 2017).
  • Focus on key value drivers as a top priority

    Value was more important than speed in most European companies’ last divestment — substantially up from 2017. Yet achieving expected value can be a major challenge. The majority (58%) say the price gap between buyer and seller expectations is 11% to 20%. However, this is more positive than last year, when 34% of Europe-based companies believed the price gap was more than 20%. One reason could be the higher use of analytics, as highlighted by this report, making the true value of the business clearer and less ambiguous.

    "Anticipating the market and thoroughly knowing your business are what differentiates a CEO who achieves their sell price over one who doesn’t.”

    Carsten Kniephoff, EY Europe, Middle East, India and Africa Divestment Leader

    But why do many companies miss out on opportunities to improve value in their divestment process?

    • Self-inflicted “own goals” are a prime cause. The majority (64%) admit value was reduced due to lack of flexibility in sale structure, up from 47% in 2017, a rise that may reflect increasing numbers of carve-outs.
    • A significant percentage, 59%, say under-developed diligence materials led to reduced offers.
    • 58% cite inadequate preparation in dealing with tax risk value, up sharply from 31% in 2017.

    Such results suggest that to exceed their expectations, companies should focus more on enhancing key asset value drivers – in particular, offering potential buyers a data-backed value story, a flexible and nimble approach, and an asset that is “good to go.”

 

Conclusion

Europe-based companies looking to divest a business over the next two years should take into account several key things they can do to maximize shareholder value.

They should:

  • Consider objectively what, where and when they should divest.
  • Look through a potential buyer’s eyes and focus on what they would want to see in an acquired asset.
  • Make sure their business, including the asset to be sold, is truly ready for divestment.

Crucially, all such action must be built on and corroborated by data-driven insights.

"A desire to divest is just one step on the journey. To achieve their value expectations, businesses need to become more agile, more flexible in structuring a deal and more adept in using advanced analytics to support their value story.”

Carsten Kniephoff, EY Europe, Middle East, India and Africa Divestment Leader

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 rapid technological change.

The 2018 study results are based on more than 900 interviews with senior corporate executives, including 318 from Europe. The survey was conducted between October and December 2017 by FT Remark, the research and publishing arm of the Financial Times Group.