1. Use portfolio reviews to build a resilient company
Many industrials companies now recognize the need to conduct more regular and thorough portfolio reviews, yet 76% of executives still find it difficult to make the portfolio review process a strategic imperative. And 81% of executives struggle to understand how technology impacts the value of their business.
To succeed in the long term, leaders of industrials companies must change from a product- or market-based growth strategy to one that addresses the growth of services and increasing digital disruption. Regular portfolio reviews are essential to ensuring that a company’s strategic growth plan is on track against multiple future-state scenarios.
2. Continuously assess divestment scenarios across your portfolio
In the face of market consolidation, executives feel increasing pressure to remain competitive by focusing on core operations and divesting noncore assets. The leading divestment trigger for industrials companies is a business unit’s weak competitive position (86%).
However, 71% also stated that the divestment was triggered by an opportunistic buyer, including an unsolicited offer. And 90% of executives believe these unsolicited offers will increase over the next 12 months.
Instead of taking a reactive stance to market pressures, activist campaigns and unsolicited offers, industrials companies can develop scenario-based plans for potential divestments. Proactive strategies not only increase the likelihood of fending off market risks, but also increase the probability of getting a higher price for any divestment.
3. Consider your divestment strategy in a digital world
Companies are redefining their business strategy in a time of rapid-speed technology advancements. First, they need to understand the value of their own technology to their business. Sellers can achieve strong valuations on their businesses not only from strong operating models and legal structures, but also from clear communication about the potential impact of technology.
Nineteen percent of industrials executives say they did not communicate technology’s effect on the future state of the business, but they later determined that price would have benefited the most from doing so. And looking into the future, 61% of executives cite the need to fund new technology investments as increasing their need to divest over the coming year.
But companies should evaluate divestments not only on the cash that can be generated to support new technology, but also the impact on the overall portfolio as the company builds out its digital capabilities and positions itself to pursue new markets.
4. Establish analytics as a competitive advantage
Industrials executives are increasingly relying on analytics to make portfolio decisions and to support divestments. For deeper insights about value, companies should use performance (descriptive) analytics, which focuses on the business base and its historical performance, and applied (predictive) analytics, which focuses on understanding what key drivers influence an outcome.
Furthermore, dynamic decision modeling (prescriptive) analytics focuses on influencing the key features that lead to the desired outcome. Divestment teams that use these analytics effectively have deeper insights into value and are better positioned to articulate value to buyers.
Industrials companies are increasingly using predictive analytics — with 80% expecting to use predictive analytics more actively within two years, up from 58% last year. This is now on par with the cross-sector trend of 84%. We see a similar uptick with prescriptive analytics. However, there is still room for growth, with just 52% of companies reporting them to be very effective.
Analytics can also provide helpful insights at the functional level, by helping companies free up working capital, predict supply chain and commercial risks for the remaining entity, optimize legal entity arrangements and more.
5. Focus on value to expedite deals
More than a quarter (27%) of industrials companies see a valuation gap between buyer and seller expectations as greater than 20%, while 53% of executives see that valuation gap as between 11% and 20%. These gaps add time to the divestment process, which should be accounted for when planning. Buyers and sellers can optimize value and time to close by launching as many activities in parallel as possible and establishing strong communication among stakeholders.
Companies should also take the time up front to plan for various scenarios to close deals sooner. For example, companies should conduct early sell-side due diligence, carefully identify the buyer pool and develop appropriate value expectations.
Industrials companies that do this well are better equipped to present the synergy opportunities for each likely buyer. Twenty-seven percent of industrials companies cite this as the most critical step for enhancing sales value of their divestments. Another critical tool is highlighting the tax upside to purchasers – 37% of industrials companies report that they have been better able to do this over the past year.
Analytics can also provide strategic advantages in divestment preparation. Just over half of industrials executives (51%) said that, of all the steps in the divestment process, analytics created the most value in pre-sale preparation. This step includes identifying potential issues and positioning the business in a positive light. Buyer negotiations also benefit from analytics through activities, such as stress testing the business from the buyer’s perspective.