5 minute read 24 Nov 2022
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The CEO Imperative series

How crisis can open doors to new growth

5 minute read 24 Nov 2022

CEOs are pursuing divestments to reinvest resources and to weather global crises, but early and decisive action is key.

In brief
  • Capital market conditions are impacting divestitures; in this environment, competitive positioning and resilience building should be the guiding light.
  • CEOs should examine their portfolio through a future-back lens and be prepared to divest assets that no longer fit in their vision of the future.
  • Embracing an asset-light mindset may help CEOs navigate increasingly complex geopolitical tensions.

Companies currently face a myriad of geopolitical, macroeconomic and operational challenges, all of which are framing their portfolio strategy.

In this context, many CEOs are disengaging from businesses no longer driving the company’s strategy and jettisoning non-core assets in the pursuit of long-term value creation for stakeholders. More than ever, CEOs are dynamically managing their portfolios.

An EY study of more than 750 CEOs finds that nearly a third of respondents (31%) are planning a divestment over the next 12 months. It also finds that more than a quarter (28%) are planning to divest assets to raise capital to invest in other parts of the business.

In this edition of the CEO Imperative Series, which provides critical answers and actions to help CEOs reframe the future of their organizations, we explore how executives are responding to the febrile and uncertain environment of 2022, and how they are planning to weather the storm. 

Looking back to the global financial crisis of 2008–10, our research found that early and bold choices on portfolio-transforming divestments proved decisive. Early divestors saw a 24% increase in total shareholder return (TSR) over non-transactors during the next decade. 

Those were brave choices in 2008–10 given the divestments often lowered near-term cash flows at a time when preserving capital was high on boardroom agendas. Now, as then, stakeholders are typically only likely to support a divestment if they understand it will free up capital to invest in areas such as technology to increase operational efficiencies, improve the customer experience and streamline decision-making.

That forces a reality in which many companies wait until the crisis has subsided before making their divestitures.

History reveals that divestment as a share of overall mergers and acquisitions (M&A) reached peak levels during 2004 and 2012–13 — essentially the periods post-downturn — when the economy was already recovering from crisis. In contrast, during the immediate downturn period, many companies stopped their divestiture programs and focused instead on internal cost management and preserving cash.

Leading CEOs are adopting scenario planning to play out their actions and reactions to these and other potential major disruptions. Assessing the portfolio of assets, operations, ecosystems and supply chains, including routes to customers, and considering how each aspect of their business is impacted at a fundamental level can yield significant insights.

Disruption never sleeps

Over US$10 trillion has been deployed through M&A since July 20201, with many companies undergoing major transformations. There is an investment arms race happening. CEOs and companies that have not yet positioned for the future will be left behind. The massive investments, especially in technology and digitalization, will begin to widen the gap between winners and losers over the near and mid-term. This investment gap is soon likely to surface in financial results. 

Divestment focused


of CEOs say the most important strategic action their company will take in the next six months is divesting assets to raise capital for investing in other parts of the business.

Also helping to get more deals over the line is that many companies planning to divest are earmarking the proceeds for reinvestment within the remaining business, especially with private equity firms sitting on record levels of dry powder and looking to invest in the downcycle.

Geopolitical poker: understanding what to hold and when to walk away

Geopolitical tension is now a top concern for CEOs. Geopolitical disruption and volatility are set to persist, which will affect global economic growth and inflation. Multiple disruptive forces are shaping the global operating environment, including regulatory divergence, climate change, technological innovation and demographic shifts. This creates a highly uncertain outlook for the future of globalization.

The vast majority of CEO respondents (95%) have altered their strategic investment plans because of geopolitical tensions. Of these, 39% have relocated operational assets and nearly a third (30%) have exited certain markets. In an increasingly febrile geopolitical environment, CEOs should be considering whether an asset-light model would create elevated resilience and agility in their operations, providing the ability to move at lightning speed should circumstances change.

An asset-light strategy involves transferring capabilities, such as people, process and technology, to “better owners” so companies can transition fixed costs to a variable cost structure, enhance agility and focus on core capabilities.

Asset-light business models are expected to be increasingly adopted by companies across the value chain well beyond the current crises impacting the world. This is in response to an increasing need for innovation, maintaining liquidity and building more agile and resilient operating models.

When all partners in an ecosystem work together to create customer value — with capabilities aligned to the better or best owners — it can create a winning value proposition for all participants. Companies that proactively seek out opportunities can benefit from a first-mover’s advantage and, ultimately, create a competitive differentiation to outperform their peers.

Managing through short-term crisis to create long-term value

Divestments should be more than just one-off decisions based on short-term factors. Corporate strategy should be the lens for determining which assets are candidates for divestment and how carve-out sales or spin-offs can focus management attention and capital toward businesses that will drive long-term value. This strategy demands a more dynamic and rigorous review — but will likely lead to a more flexible organization that is able to respond on this and other crises in a far more agile and faster way. Leading CEOs will clearly communicate a vision of how divestment decisions strengthen the company’s core business.

To form a winning strategy, CEOs should ask themselves five key questions:

  • Is your company performing at its full potential — on growth, margin, return on invested capital (ROIC) and total shareholder returns metrics versus your peers? Is there an opportunity to perform even better?
  • Do you have businesses or capabilities that need to be retained or non-core assets that may have a better owner in the marketplace?
  • Can you create greater focus within your organization by retaining your core capabilities only?
  • Is your business model appropriate for the products and services you sell in various markets?
  • Are you agile enough to react quickly to changing geopolitical conditions?

Strategies for successful corporate separations

Explore further to discover why the market is rewarding the shrink-to-grow model and request the full report.

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In prior economic downturns, CEOs have delayed divestitures for far too long. Now as then, the winners will likely be those who act first and fastest. Positioning for growth and optionality now will lay the foundation for accelerating value creation for the longer term. And using scenario analysis to consider what their industry dynamics will be in the future will be the best guide to understand portfolio strengths and assets that are better suited for a sale.

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