With many companies in the technology sector experiencing decelerating revenue growth, rising cash balances and higher activist investor interest, it’s no surprise that so many tech executives are focused on managing their portfolios, with divestments playing a key part. In fact, 82% of tech companies say that they plan to initiate a divestment within the next two years, according to the Ernst & Young, LLP (EY) 2019 Global Corporate Divestment Study. Accordingly, we set out to understand the impact of divestment on shareholder return.
We also wanted to understand if investors view companies that have a focused approach to divestment more favorably, and whether the divestment premium grew over time.
We analyzed the divestment activity of technology companies with a market cap higher than US$5 billion (n=349). Companies were classified under IT, technology hardware and equipment, and semiconductor sectors in Capital IQ with a market cap of more than US$5 billion as of September 2019.
We identified 308 relevant transactions by 110 unique divestors. Deals screened from Capital IQ included corporate divestments in the sectors of information technology, technology hardware and equipment, and semiconductors and semiconductor equipment, with an M&A announcement date of July 1, 2008 through June 30, 2018, and excluded canceled deals and public sellers with market capital less than US$1 billion and deal value less than US$1 million.
The divestors were then segmented into the following: focused divestors (more than two divestments), opportunistic divestors (one to two divestments) and non-divestors (n=239).
As slower-growth tech companies (less than 20% CAGR) were 2.3x more likely to divest compared with their faster-growing peers (greater than 20% CAGR), our study excluded large, faster-growing companies from the analysis (n=91, comprised of 76 non-divestors and 15 divestors).
To compare companies, we analyzed total shareholder return (TSR) and EV/revenue and EV/EBIT multiples for divestors vs. non-divestors over corresponding 12- and 24-month periods from the divestment date. For 2017 and 2018 deals that have not been completed in the two years since deal announcement, TSR (two-year) is calculated from the announced date of the deal through September 6, 2019.
For chart 3, EV/EBIT and EV/revenue multiple excludes fast growing companies defined as three-year revenue CAGR >20%, EV/EBIT multiple >50, EV/Revenue >5, not meaningful “NM” multiples and outliers with inconsistent/volatile numbers across 10 years. For every group, calculated average multiple for individual year and then calculated median for 10 years.