- 84% of companies plan to divest by 2021, up from 43% two years ago
- 81% say that desire to streamline operating models will impact divestment plans
- 70% expect large-scale transformational divestments, up from 50% in 2018
Companies are now divesting businesses to gain competitive advantage, especially in the face of changing technology, customer tastes and shareholder pressure, according to EY Global Corporate Divestment Study 2019.
The annual survey of more than 900 global executives shows the elevated environment for divestment activity is poised to continue, with 84% of companies planning to divest within the next two years.
More than four out of five companies (81%) say streamlining their operating model will impact their divestment plans this year, demonstrating a growing desire for companies to be more agile as they face new and existing competition.
Paul Hammes, EY Global Divestiture Advisory Services Leader, says:
“Companies must balance the need to react quickly in the face of change with the need to take the necessary time to prepare for divestments that can drive stronger long-term performance. This is a marked shift from only two years ago when divestments were not as widely viewed as the strategic enablers they are today. Many companies are responding appropriately to new customer demands and rising competition from emerging technology and cross-sector rivals.”
Divestments are more likely to be proactive, high-impact initiatives than reactive responses to change, the survey shows. Within the next 12 months, 70% of companies expect large-scale transformational divestments, up from 50% in 2018. Companies that cite a business unit’s weak competitive advantage as a driver in their latest divestment (a reactive decision) fell significantly to 69% from 85%.
Geopolitical uncertainty accepted as an unpredictable factor in decision-making
The number of companies that say macroeconomic and geopolitical triggers will factor into divestment decisions has dropped to roughly half (51%) from 62% in 2018. Companies may have grown more accustomed to global uncertainty: 74% still expect geopolitical shifts to push operating costs higher, and 69% wonder whether they can expect existing cross-border trade agreements to remain intact.
Technology blends sectors, sparks divestment activity
Sector convergence is more likely to drive the divestment decisions of 70% of executives. They can no longer rely on old playbooks to remain competitive. To that end, 80% of companies expect the number of technology-driven divestments to rise in the next 12 months, compared with 66% last year.
Sixty (60%) percent of companies reinvested proceeds from their last divestment into new products, markets and geographies. This strategy helps companies better respond to cross-sector opportunities and can create longer-term value for shareholders and the company.
Hammes says: “Cross-sector trends have changed the competitive landscape for some companies in previously well-defined industries. At the same time, pure-play portfolios are being looked upon favorably. So, their challenge is finding new ways to innovate for the next generation consumer to drive competitive advantage and shareholder value.”
Sell with a private equity buyer in mind
According to the survey findings, having a strong value story, backed by early preparation that will address the questions of a broad buyer pool, is more important than ever. Slightly more than two-thirds (67%) of sellers say the price gap between buyers and sellers is greater than 20%; last year, only a quarter of sellers reported such a gap. A target operating model is especially important to private equity (PE) buyers that have plenty of capital to deploy but lack business synergies; therefore, instilling confidence that the carve-out has been fully prepared for separation.
One-quarter of PE firms say a well-thought-out, stand-alone case and a related cost model are key to keeping them in the sales process, and half say access to granular data has been a key factor in their decision about whether to stay in an auction process. Detail is important, but so is accuracy: 39% of PE bidders say that if the business misses forecasted performance, they would drop the price or walk away.
Hammes says: “Corporates need to approach the divestment market with the needs of a private equity buyer in mind. Private equity firms compete hard for quality assets, but corporates need to come to the table with the right story – and supporting facts – to make buyers comfortable with their decision to move forward. Overlooked details or unfounded optimism can quickly trigger a loss of confidence.”
View the study online at ey.com/divest.
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EY Strategy and Transactions teams work with clients to navigate complexity by helping them to reimagine their eco-systems, reshape their portfolios and reinvent themselves for a better future. With global connectivity and scale, EY Strategy and Transactions teams help clients drive corporate, capital, transaction and turnaround strategies through to execution, supporting fast-track value creation in all types of market environments. EY Strategy and Transactions teams help support the flow of capital across borders and help bring new products and innovation to market. In doing so, EY Strategy and Transactions teams help clients to build a better working world by fostering long-term value.
About the EY Global Corporate Divestment Study
The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and prepare for a widening pool of buyers in a resilient yet volatile market. The results of the 2019 study are based on more than 930 interviews with corporate executives worldwide surveyed between September and November 2018 by Acuris. Key sector findings can be found at ey.com/divest.