Divesting to invest in a technologically enabled future
Capital raised from divestments can help boost cash reserves and fortify balance sheets. It will also accelerate the technology agenda — and the crisis is driving the need for more significant investments in areas such as automation.
While the pandemic has exposed cracks in some companies’ ability to support remote workforces, the quickly changing demands of customers are an even bigger consideration. Forecasting value drivers beyond the crisis will precipitate different thinking now — such as developing new ecosystems of partnerships and alliances that put companies at the forefront of disruption rather than becoming the disrupted.
As such, more than two-thirds of companies (67%) say the need to fund new technology investments will make them more likely to divest over the next 12 months.
Cultivating strategic partnerships to strengthen operational agility
As part of portfolio optimization and divestment strategy, companies are re-evaluating their ownership of non-core assets and considering migrating to an ecosystem of strategic partners. These partners, typically seen as better owners or managers of those assets, can help transition fixed costs to a variable cost structure, enhance company agility, shift resources to focus on core or critical capabilities, and achieve higher total shareholder return. We anticipate an increase in this trend as companies enter the recovery stage of the COVID-19 pandemic, and increasingly focus on supply chain resiliency.
While not necessarily new or novel, this asset light approach has been driven by several factors — the onset of digitization, economic downturn, shareholder activism and unprecedented levels of cash within private equity. In fact, 33% of the Indian companies surveyed highlighted that they want to outsource manufacturing operations. Companies that have taken this step ahead of a sale are more likely to achieve a higher valuation of the remaining business and exceed expectations on the price of the divestment.
Preparation is key to maximizing value from divestments
The pandemic has placed significant stress on balance sheets. This is resulting in cash crunch and liquidity crisis within corporate India. As such, 58% of the companies surveyed believe that there will be an increase in distressed sales, while a third (33%) say there will be fewer willing strategic sellers.
The economic slowdown has served as an impetus for organizations to review their operations and take steps to create value prior to selling a business. More than two-thirds (67%) of companies say they will increase their level of divestment preparation.
While the majority of the surveyed businesses cite a delay in divestments, 58% of Indian companies indicate that they plan to divest within the next 12 months. And when that happens, 67% of companies believe that the number of buyers from outside their sector will increase. Therefore, companies should prepare for a detailed diligence of the business to be required by buyers.