4 minute read 19 Jun 2020
Wild milk thistle plant

How companies in India can build resilience through divestments

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 19 Jun 2020

Indian companies are strategically divesting to free up capital, build resilience and drive long-term value.

The 2020 EY Global Corporate Divestment Study suggests that the economic downturn is providing an impetus for sellers to take action, with more than two-thirds of Indian companies (67%) planning a divestment within the next two years.

In light of the COVID-19 pandemic, executives need to plan now for what happens next. More than half (58%) of Indian companies surveyed say the impact of the pandemic requires them to raise capital, while 67% will look to reduce debt levels. Companies must be willing to act as they face even tougher capital allocation decisions. And capital investments will likely be needed now to futureproof the organization in terms of technology, automation and supply chains.

There is evidence that taking bold action now could pay off — and the most resilient and successful companies will be those that have shown discipline and focus on portfolio transformation.

This year’s EY Global Corporate Divestment Study is unlike any other in its eight-year history. When EY started the process for the 2020 study, it was business as usual: gathering perspectives from C-suite executives across India on how they approach portfolio strategy and divestment execution. By the time the research concluded in January 2020, COVID-19 had begun rapidly evolving into a global crisis.

There’s no doubt the financial and economic impact of the crisis has caused shifts in divestment perspectives over the last few months. Accordingly, we opened our research back up in April 2020 to retake the pulse of corporate executives. Here are those insights.

Refocus on core business

Those emerging stronger in the next phase of this current crisis will be reimagining not only their portfolios but the very core of their business right now. Companies may not necessarily sell in the short term, but they understand preparation is necessary in order to act when required. More than half of companies (58%) say they will initiate their next divestment within a 12-month time frame. The result is a long-term focus on the highest-growth aspects of the portfolio with 75% planning to reinvest divestment proceeds in core businesses.

Divestment study – when expect to initiate your next divestment

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.

Divestment study – what do you expect to see in the market over the next 12 months

While we don’t know exactly what’s next and beyond the COVID-19 crisis, we do know that these trends are driving divestment strategy now. Strategic planning and plotting the continued course of transformation is on the agenda. So is strategically divesting to free up capital, build resilience and drive long-term value.

Summary

The 2020 EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business.

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.