Global Corporate Divestment Study

Technology watch

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Rapid innovation drives strategy shifts

Few industries can both create and take advantage of disruptive innovation like technology. Rapid developments in big data, the cloud and mobile computing are transforming the sector. Technology companies need to carefully manage their portfolios to keep pace given their cost of capital and potential for higher returns.

Technology executives clearly recognize this. Almost half (49%) of the sector’s executives surveyed in our Global Corporate Divestment Study said the big data trend had motivated them to consider a divestment. Rationalizing portfolios and positioning their businesses to benefit from new growth areas have become crucial strategies for the industry’s leading companies to adapt to change and drive value for investors.

Q: What are the primary strategic reasons for you to consider a divestment?

EY - technology divestment

Search for hidden value in your portfolio

Despite the benefits, valuation ranks as the biggest divestment challenge: technology firms regularly use their parent company’s market value, rather than that of the underlying asset, as a basis for valuation.

Further, many technology companies are sitting on hidden gems: selling unfashionable units can unlock hidden value that analysts may not see.

For example, many slower-growth companies own assets with the potential to be valuable to buyers as new innovations come to light, and many “industrial” companies are finding assets that – if packaged and prepared as technology companies – could be sold at technology sector multiples. Selling these assets can offer companies a more efficient route to monetization than developing them internally.

Look beyond operational challenges

Operational challenges can also prevent technology businesses from being bold in their divestment strategies, even if their portfolio review concludes the need to sell a business unit.

Stranded costs are also cited by executives as one of the biggest challenges to overcome for their next divestment (30%). However, effective planning for business separations, including conservative time estimates, consideration of resource issues at the parent and asset level and evaluating the value potential buyers may see in an asset, can help alleviate those issues.

Technology companies serious about focusing on fast-growing markets need to look closely at sending deals their way.

Case study

Germany-based technology company

Portfolio reviews “help manage the company’s investment tools, while keeping a proper record of different elements that contribute to an effective portfolio,” says a corporate development executive.

The company’s continuous portfolio reviews consider financial and strategic factors, but the main focus is sales growth, “the major financial concern, as it so closely impacts the running of the business,” he says.

The company’s thorough portfolio review process played a role in its last major divestment. “The strategic factors we examined when considering this divestment concerned its low levels of synergies with other parts of our business and its dissimilarity from our core business,” the executive explains. “It also was not a leader in its operating space, and the market in which it operated was not an attractive one for us.”

Despite its recent successes, the corporate development executive anticipates some challenges relating to IT separation, regulatory clearance and stranded costs. The executive also notes that the market is likely to see an uptick in divestments over the next year.