Will you set the divestment pace, or try to keep up with it?

By

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.

5 minute read 12 Feb 2019

Our 2019 study reveals the intent to divest remains near an all-time high with portfolio management and deal preparation vital to success.

Divestment levels remain near an all-time high, according to the EY Global Corporate Divestment Study 2019 – our annual global survey of more than 900 corporate executives. Eighty-four percent of companies plan to divest within the next two years.

Near-record divestment

84%

of companies plan to divest within the next two years.

Divestment levels have ramped up despite geopolitical concerns and desynchronized economic growth. Companies are learning to cope with these external factors and are using divestments to raise capital for future investments and reposition themselves for growth.

How to create a portfolio that delivers

Companies are also adopting a more rigorous approach to portfolio management. According to the EY Global Capital Confidence Barometer survey, two-thirds of companies say they now review their portfolios at least every six months.

This disciplined approach to portfolio management is working. Increasingly, companies are divesting for strategic reasons, rather than because of a failure in the business: companies that cite a unit’s weak competitive position as a driver in their latest divestment fell significantly – to 69% from 85%.

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 chains. Eighty percent of companies expect the number of technology-driven divestments to rise in the next 12 months, compared with 66% in 2018. These plans may support the capital requirements to fund new investments, with 60% saying proceeds from their last divestment were reinvested into new products, markets and geographies.

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.

Becoming more agile

81%

of companies say streamlining their operating model is a divestment consideration.

The result of these strategic portfolio changes should be a streamlined operating model that gives companies the ability to quickly execute on their capital agendas. In working towards a sharper, more agile organizational set-up, companies will gain a competitive advantage over their peers.

This is why as many as 81% of companies say operating model improvements will factor into their divestment plans over the next 12 months – while two-thirds say it was a factor behind their most recent divestments.

Three ways to improve divestment decisions
  • Conduct regular portfolio reviews to identify strategic areas for growth
  • Understand a business’s performance compared to peers and its contribution to the rest of the portfolio
  • Determine where capital can be released and reallocated toward growth and technological innovation

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How to prepare for divestment success

Timing is vital when it comes to getting the right price — yet nearly two-thirds (63%) of companies say they held onto assets for too long, up from 56% in 2018. By contrast, sellers who say they did not hold onto assets too long were twice as likely to secure a better price from the transaction. 

To help improve this, sellers are focusing on making their businesses divestment-ready, with 32% saying that optimizing the legal structure was the most important factor in enhancing value in their last divestment. However, 57% state that lack of flexibility in the sale structure eroded deal value.

Greater flexibility in deal structure gives businesses room to optimize according to market conditions, tax efficiencies, timeline, anti-trust considerations and net proceeds target. Similarly, sellers must address regulatory obstacles such as business licenses and labor requirements at an early stage of the divestment process to reduce delays and transition cost overruns.

Businesses that fail to consider tax considerations also risk value erosion — two-thirds of those surveyed say lack of preparation in dealing with tax risk eroded value in their last divestment. To minimize tax exposure on the deal, companies must also consider country-by-country requirements. Forty-five percent of companies say they expect increased tax challenges in their future divestment process.

  • Always be “divestment-ready.” A well-defined portfolio strategy, coupled with the right resources and expertise, can provide confidence in the ability to act when the time is right.
  • Make tax a top consideration. Tax complexity can add time and erode value if not sufficiently addressed early in the sale process.

Waiting too long to act

63%

of companies say they held onto assets too long.

How to plan for the next wave of buyers

Sellers are also facing a significant gap in what they think their business is worth and what buyers are willing to spend. More than two-thirds of companies report a price gap greater than 20%; last year only a quarter of companies said the same.

This means it is increasingly necessary for sellers to present a well thought out, credible value story that addresses buyers’ needs through supporting data and advanced analytics. There is often a disconnect between buyers and sellers around the value story that leads to valuation disparities. Those divesting frequently value assets through a combination of business improvements and projected earnings power, while buyers may calibrate against historical earnings to discount for short-term risks. 

Another way to enhance divestment value is to present a stand-alone operating model for the business. Sellers that do this are twice as likely to achieve a higher price and secure their deal faster than those choosing not to do so. Private equity buyers are more likely to require a stand-alone operating model to have confidence the business is ready for separation. Further, sector convergence requires sellers to identify business synergies and demonstrate business alignment to cross-industry buyers.

With record levels of capital to be deployed, PE is actively pursuing quality assets and increasing competitive tension in the sales process. Although 74% of sellers say that the increased time required for private equity diligence requests are a challenge, 38% state that working with a private equity buyer led to a rise in purchase price. 

Four ways to maximize divestment value
  • Always be “divestment-ready.” A well-defined portfolio strategy, coupled with the right resources and expertise, can provide confidence in the ability to act when the time is right.
  • Make tax a top consideration. Tax complexity can add time and erode value if not sufficiently addressed early in the sale process.
  • Present a stand-alone operating model — especially to PE buyers.
  • Articulate a clear value story around growth opportunities, capital requirements, the management team and the overall business going forward.

Different perspectives

68%

of companies say they see more than a 20% price gap between buyer and seller expectations.

How to reposition for a different future

Despite some challenges – and ongoing global geopolitical and economic uncertainty – the deal environment continues to look promising, resilient and competitive.

By taking the critical steps to prepare a business for sale, and addressing considerations from a widening pool of buyers, companies can improve divestment outcomes.

In achieving more successful divestments, sellers can accelerate their pace of transformation, reposition the remaining business for future growth and, ultimately, drive value for shareholders, employees and their wider communities.

Summary

The intent to divest is near a record high, with companies worldwide using divestment as a strategic tool to reposition themselves for growth. Despite uncertain macroeconomic and geopolitical conditions, organizations are experiencing a favorable deal market. With the right strategic and operational approach, companies can look to the next wave of private equity, cross-sector and corporate buyers to maintain a competitive bidding process and maximize deal value. Read the full Global Corporate Divestment Study (pdf).

About this article

By

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.