The importance of portfolio reviews is further evidenced in the deconglomeration trend of the last several years, sparked in part by shareholder activism. Many companies have become increasingly complex by operating in several disparate, yet intertwined, businesses. This complexity, while often resulting in some cost savings, has come at a price. In addition to hampering agility, this conglomerate model often negatively affects market valuation. Various academic studies indicate large conglomerates often operate at a 5%–15% discount relative to the sum of their parts.
Companies that divest may redeploy proceeds in growth areas to improve shareholder value. Sixty percent of companies reinvested proceeds from their last divestment in new products, markets and geographies. Honeywell completed two spin-offs in 2017 representing US$7.5 billion in revenue. When the divestitures were announced, CEO Darius Adamczyk commented that he was “excited” about M&A in its four businesses, and the company has made acquisitions since.
Technology accelerates the pace of transformation
Companies must continually reformulate their capital agendas and go-forward strategies relative to their competition, particularly in light of technology-driven changes in consumer habits and supply chain. Seventy percent expect more large-scale transformational divestments within the next 12 months, up from 50% in 2018. At the same time, companies are making acquisitions that allow them to add new capabilities.
Sector convergence prompts divestment: 70% say sector convergence is more likely to drive their own divestment decisions, as they focus on innovation in the face of new competition from companies outside of their traditional sectors. With technology often being the catalyst of this convergence, many companies have redefined their business strategies around a narrower set of priorities and are determining the capital investments required to support technology for future growth.