5 minute read 12 Feb 2019
Why are so many companies divesting?

Why so many companies are divesting

Authors

Carsten Kniephoff

EY EMEIA Divestiture Advisory Services Leader

Dedicated advisor to transforming companies. Ambitious front runner implementing tech tools, new solutions for companies selling and separating. Enthusiastic and innovative. Fun-loving father of two.

Paul Hammes

EY Global Transaction Diligence and Divestiture Advisory Services Leader

Leader in transformational global divestitures. Catalyst for profitable growth. Innovator. Value driver. Passionate about diversity in business. Husband. Father.

Rich Mills

EY Americas Divestiture Advisory Services Leader

Leader of complex divestitures that help enhance shareholder value and drive more efficient capital allocation. Dedicated husband and father.

Paul Murphy

EY Asia-Pacific Divestiture Advisory Services Leader

Change advocate. Focused on due diligence and best practice divestment for large corporates.

5 minute read 12 Feb 2019

Divesting is helping streamline operating models to keep pace with technological innovation and improve agility.

The intent to divest remains at record levels, according to the EY Global Corporate Divestment Study 2019 — 84% of companies plan to divest within the next two years, consistent with last year’s record of 87%. Despite uncertainty from tariffs, a trade war, desynchronized growth and geopolitical concerns, the market offers sellers a resilient yet competitive environment.

Streamlining operating models for better agility and sharper focus

Faced with evolving sector landscapes, businesses are continuously evaluating their growth strategies and competition. They are more rigorous in portfolio management — two-thirds (66%) of companies say they review their portfolios at least every six months, according to the EY Global Capital Confidence Barometer survey — and they continue to actively dispose of underinvested assets best left in the hands of another owner. This disciplined approach to portfolio management is working. More companies are divesting for strategic reasons as opposed to because of a failure in the business: companies that cite a unit’s weak competitive advantage as a driver in their latest divestment fell significantly to 69% from 85%.

The result is a streamlined operating model that gives companies the ability to quickly execute on their capital agendas. Eighty-one percent of companies say streamlining the operating model will factor into their divestment plans over the next 12 months, while two-thirds (67%) say this was a factor behind their most recent divestments.

Streamlining operating model

81%

of companies say streamlining the operating model will factor into their divestment plans over the next 12 months.

The importance of portfolio reviews is further evidenced in the deconglomeration trend of the last several years, sparked in part by shareholder activism. Many companies have become increasingly complex by operating in several disparate, yet intertwined, businesses. This complexity, while often resulting in some cost savings, has come at a price. In addition to hampering agility, this conglomerate model often negatively affects market valuation. Various academic studies indicate large conglomerates often operate at a 5%–15% discount relative to the sum of their parts.

Companies that divest may redeploy proceeds in growth areas to improve shareholder value. Sixty percent of companies reinvested proceeds from their last divestment in new products, markets and geographies. Honeywell completed two spin-offs in 2017 representing US$7.5 billion in revenue. When the divestitures were announced, CEO Darius Adamczyk commented that he was “excited” about M&A in its four businesses, and the company has made acquisitions since.

Technology accelerates the pace of transformation

Companies must continually reformulate their capital agendas and go-forward strategies relative to their competition, particularly in light of technology-driven changes in consumer habits and supply chain. Seventy percent expect more large-scale transformational divestments within the next 12 months, up from 50% in 2018. At the same time, companies are making acquisitions that allow them to add new capabilities.

Sector convergence prompts divestment: 70% say sector convergence is more likely to drive their own divestment decisions, as they focus on innovation in the face of new competition from companies outside of their traditional sectors. With technology often being the catalyst of this convergence, many companies have redefined their business strategies around a narrower set of priorities and are determining the capital investments required to support technology for future growth.

Sector convergence

70%

of companies say sector convergence is more likely to drive their own divestment decisions.

Technology-driven divestments increase: 80% of companies expect the number of technology-driven divestments to rise in the next 12 months, compared with 66% in 2018. These plans may also support the capital requirements to fund new technology investments. Further, companies that say changes in the technology landscape are directly influencing their divestment plans are more than seven times as likely as their counterparts to secure a higher price for the business sold. This may be because these companies have their eyes on the market and their portfolios, and are more prepared to address the impact technology has on their operating model.

Geopolitical shifts: a constant variable in the divestment equation

Despite uncertainty within the global markets, whether driven by tariffs or trading costs, companies must continue to diligently review their portfolios. The current US administration has raised the stakes over global trade, while Brexit in the UK, the rise of populist governments in Europe and the ongoing debate over immigration add to complexity when making strategic portfolio decisions.

Companies appear to have grown more accustomed to this uncertainty over the past year: 51% of companies, compared with 62% in 2018, say that macroeconomic and geopolitical triggers will play into divestment decisions next year. Still, these factors must be weighed in the financial forecasts of companies operating in affected markets.

Almost three-quarters (74%) of companies expect these geopolitical shifts to push operating costs higher, while 69% wonder whether they can depend on existing cross-border trade agreements to remain in force. They will have to factor these rising costs into their divestment strategy and timing. Whether these factors can otherwise be addressed through vendor negotiations, price increases or cost reductions may factor into whether a company decides to divest a unit that is affected by tariffs, trade disputes or geopolitical uncertainty.

Active portfolio management tempers opportunistic divestments

Through more active portfolio management, companies have sharpened their focus on agility and improved their ability to respond to new opportunities both inside and outside of their sector. They have become better at identifying assets ripe for divestment and are starting to prepare their assets to maximize the potential for success when receiving an unsolicited bid. To capture full value, opportunistic divestors need a solid understanding of their earnings power, net assets and working capital, both historically and projected. It is no longer enough to focus on pro forma historical performance. Sellers have to understand and credibly portray — using analytics and sophisticated tools — the drivers of forecasted performance for potential buyers.

Opportunistic divestments by the numbers

  • 65% of those reporting an opportunistic divestment say they had already started considering a sale and therefore completed some level of preparation when the unsolicited bid was made. 
  • 72% of companies opened their opportunistic divestment process up to at least one other buyer to create competitive tension and validate the price offered. 
  • 46% of sellers describe their last divestment as opportunistic, down from 71% in 2018. 
  • 34% of companies say they are not confident they would be able to accurately value their businesses were they to receive an unsolicited bid today.

When opportunistic divestments present themselves, success is by no means guaranteed. Unplanned divestments are four times less likely than planned divestments to achieve expectations on price and improve the valuation of the remaining company. 

With a more active approach to portfolio management, companies can begin to prepare a compelling value story for an increasingly diversified pool of buyers. This is an essential step in closing the widening price gap between buyers and sellers.

  • The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business.

    The 2019 study results are based on 1,030 interviews with 930 senior corporate executives and 100 private equity executives. The survey was conducted between September and November 2018 by Acuris.

Summary

Executives are reviewing their portfolios even more frequently than before, to streamline operating models for better agility and sharper focus. Technology accelerates the pace of transformation and geopolitical shifts are a constant variable in the divestment equation. More active portfolio management tempers opportunistic divestments. Read the full Global Corporate Divestment Study (pdf).

About this article

Authors

Carsten Kniephoff

EY EMEIA Divestiture Advisory Services Leader

Dedicated advisor to transforming companies. Ambitious front runner implementing tech tools, new solutions for companies selling and separating. Enthusiastic and innovative. Fun-loving father of two.

Paul Hammes

EY Global Transaction Diligence and Divestiture Advisory Services Leader

Leader in transformational global divestitures. Catalyst for profitable growth. Innovator. Value driver. Passionate about diversity in business. Husband. Father.

Rich Mills

EY Americas Divestiture Advisory Services Leader

Leader of complex divestitures that help enhance shareholder value and drive more efficient capital allocation. Dedicated husband and father.

Paul Murphy

EY Asia-Pacific Divestiture Advisory Services Leader

Change advocate. Focused on due diligence and best practice divestment for large corporates.