Macroeconomic uncertainty, geopolitical instability and technological advances are disrupting all sectors. And they’re causing European-based companies, in particular, to adjust their capital allocation to gain a competitive advantage.
More than half (51%) of European companies surveyed are planning to divest within the next two years (up from 48% last year). But are they adding value? Simply wanting to divest does not necessarily lead to the best outcome.
To achieve value expectations, sellers need to think clearly about both the equity story for potential future owners as well as the impact on the remaining business. Once those parameters are defined it’s much easier to run the process quickly and efficiently.
Companies that react too hastily to external disruptive forces, such as geopolitical and macroeconomic instability, often fail to achieve their value objectives. The impact of such external forces on short-term business performance can sometimes outweigh the decisions to buy, fix or sell a business that are based on long-term growth strategy.
Of those companies in Europe that divested for geopolitical reasons, 80% say political instability was a factor in their own region and 77% referred in particular to Brexit.
This sentiment looks likely to continue, as 77% of European companies believe that geopolitical uncertainty will increasingly influence future divestment plans. This is notably higher than the 49% of companies in the Americas and 41% in Asia-Pacific who reported the same sentiment.
EY analysis shows that many European companies act too quickly in the face of disruption, advancing divestment decisions by prioritizing speed over deal value. This can lead to a lower sale price, and in turn the belief that the divestment did not create long-term value for the remaining business.
Only 60% of European executives believe the cost of a recent divestment paid off, which is lower than in the Americas (88%) and Asia-Pacific (80%). Probably because of the emphasis on speed, a total of 56% of European companies surveyed claim a lack of fully developed diligence materials, leading buyers to reduce price. By comparison, 39% of companies in the Americas and 48% in Asia-Pacific reported the same.
When it comes to price expectations, only 20% of European companies say that their recent divestment exceeded their expectations. This compares to 42% in the Americas and 36% in Asia-Pacific.
Think about flexible transactions structures
There can be a myriad of reasons that make extracting a business more difficult and costly, such as operational interdependencies and stricter employee regulations. Evidence suggests that different and flexible transaction structures can alleviate some of those challenges, but European companies are less likely to contemplate an alternate transaction structure at 65% versus those in the Americas (75%) and Asia-Pacific (76%).