4 minute read 6 Jul 2021
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How Indian CxOs can develop successful divestment strategy

By Naveen Tiwari

EY India Operational Transaction Services Leader

Seasoned operational transaction professional. Passionate about driving value from M&A transactions. Adventure biker. Avid traveler.

4 minute read 6 Jul 2021

The 2021 EY India Corporate Divestment Study shows that companies need to connect strategy with divestments to drive long-term value.

In brief
  • The majority of Indian companies acknowledge they held onto assets too long, forgoing opportunities to enhance sale value as well as shareholder return.
  • There is a need to invest the proceeds of divestments into building core capabilities.
  • Divestments are increasingly in focus as companies seek to tap long-term opportunities in their core businesses.

The past year has underscored how quickly customer needs and technology requirements can change. Businesses that may have long been deemed critical to a portfolio could now unnecessarily be consuming resources and utilizing capital that should be deployed elsewhere. This year’s EY India Corporate Divestment Study (pdf) reveals that more companies than ever — 73% — plan to divest within the next 24 months.

However, the vast majority of Indian companies failed to meet key expectations from prior divestments. Indian companies say their most recent divestment didn’t meet price (90%) and timing (87%) expectations.

CEOs and CFOs in India can improve shareholder value by considering divestments as part of the company’s long-term strategy, rather than as one-off decisions driven by short-term financial concerns. With this strategic lens as the guide, Indian executives can follow a three-fold approach for divestments:

  • Develop a clear view of how each business drives long-term value
  • Leverage portfolio reviews to drive strategic divestment decisions
  • Use the divestment as an opportunity to reimagine RemainCo

Develop a clear view of how each business drives long-term value

As companies face multiple challenges due to the pandemic, it is important for CEOs to prepare a robust and future-looking divestment strategy. Companies need to identify which assets/businesses no longer fit into the corporate strategy and are non-core. Of CEOs surveyed, 60% acknowledge that they consider potential for long-term value creation an important criterion to identify the divestment candidate.

Companies are using divestment proceeds to bolster growth in key segments through investments in core capabilities. Eighty percent of companies say they used funds from divestments to invest in technology to enhance digital capabilities.

CEOs face a plethora of challenges while finalizing their divestment strategy, which includes communicating the divestment rationale. In fact, 86% of CEOs acknowledge that articulating the value of a divestment to stakeholders is one of the toughest challenges they face while finalizing their business strategy. A well-formulated strategy, supported by a robust and focused process, can help companies enhance the value from their divestments.

Articulating the value of the divestment

86%

of CEOs acknowledge that articulating the value of a divestment to stakeholders is one of the toughest challenges they face while finalizing their business strategy.

Top considerations in divestment strategy:

  • Have a clear view on strategic alignment, competitive advantage and potential for long-term value creation for each business
  • Consider pursuing divestments to help accelerate investments in technology, new products and geographies and fuel new growth for RemainCo
  • Communicate effectively with stakeholders the need to divest a business that is not a strategic fit, even though it might be a strong performer

Leverage portfolio reviews to drive strategic divestment decisions

Indian companies understand the importance of divesting the right asset at the right time. The EY survey highlights that 70% of executives say they held onto assets too long when they should have divested them. Acting in a timely manner to divest can increase sale value and shareholder returns.

In order to take full advantage of a divestment, it is important to have a rigorous portfolio management process in place. There is a need to define KPIs and how to identify non-core and nonperforming assets. In line with this, 86% of the CEOs acknowledged that they can provide better guidance on what’s core vs. non-core in relation to the company’s strategy to identify the right divestment candidate at the right time.

Through greater portfolio agility and a strong divestment strategy, companies can capture strategic benefits for the long term. In effectuating a divestment, 53% of executives say they were able to redefine their growth strategy focused on core businesses.

Divestment timing

70%

of executives say they held onto assets too long when they should have divested them.

Top considerations in portfolio reviews:

  • Make divestments part of comprehensive strategy to focus on core businesses in order to invest in long-term, value-yielding opportunities
  • Rigorously review the portfolio using the key metrics to define how each business complements the enterprise strategy and contributes to total shareholder return
  • Focus on value-creation activities to help companies improve efficiencies, thus expanding the value of their divestments

Use the divestment as an opportunity to reimagine RemainCo

A large or highly entangled divestment also provides an opportunity to reimagine RemainCo while the organization is primed for change. Yet one of the biggest regrets expressed by Indian companies is their lack of focus on realignment of the RemainCo. Sixty percent of companies acknowledge not placing enough emphasis on RemainCo during their last divestment.

In order to create value for the remaining organization, it is imperative to have a laser focus on the operational performance of the RemainCo, which 7 out of 10 companies agree is critical in limiting disruption during the divestment period.

Reimagine RemainCo

50%

of companies acknowledge not placing enough emphasis on RemainCo during their last divestment.

Recommendations:

  • Divestments can provide an indispensable opportunity for management to reassess, reimagine and realign RemainCo to create greater value.
  • Limiting disruption of the remaining business operations should be one of the key metrics to measure a successful divestment.
  • To successfully execute a divestment, management must make a clear plan to streamline management structure and improve market perception for RemainCo.

Aligning bold divestment decisions with long-term strategy can help CEOs increase stakeholder value and reimagine the remaining business for the 73% of Indian companies planning to divest within the next two years.

Summary

The EY Global Corporate Divestment Study is an annual survey of C-level executives from large companies around the world. Results are based on an online survey conducted between January and March 2021, with 88% of respondents holding the title of CEO, CFO, or other C-level executive. Download the 2021 EY Global Corporate Divestment Study (pdf) to learn more.

About this article

By Naveen Tiwari

EY India Operational Transaction Services Leader

Seasoned operational transaction professional. Passionate about driving value from M&A transactions. Adventure biker. Avid traveler.