81% companies plan to undertake divestments within the next two years: EY India survey
- Evolving customer preferences, macro-economic uncertainties and technological changes are the key factors driving divestments
- 63% of surveyed companies have divested to streamline their operating model
- Advanced analytics used during buyer negotiation to create more value for sellers
- 65% of surveyed companies are considering reinvesting funds raised from divestment into their core business
India, 21 May 2019: EY, the leading global professional services firm, today announced the launch of its first ‘India Divestment Study’ 2019, a survey-based report on divestments in India to identify growth areas. The report highlights that whilst 81% of the companies surveyed expect to divest in the next two years, 67% expect large-scale transformational divestments in the next 12 months.
About 63% respondents said their last divestment was driven by a need to streamline their operating model, with 86% adding that it will continue to be a key factor in their divestment plans over the next 12 months. Further, 70% of Indian companies say a weak competitive position is another key factor that drove their last divestment.
Evolving customer preferences, macro-economic uncertainties, technological changes, shareholder pressure and geopolitical instability are some of the key factors that are driving companies to consider divestments. 88% of Indian companies expect geopolitical shifts to push operating costs higher, while 75% said that changes in cross-border trade agreements will affect their plans to divest.
Businesses need to continuously evaluate their strategy to remain competitive and have access to the required capital for investment. The report indicates that 65% of the surveyed companies used the proceeds from their last divestment to invest in their core business, with 56% stating that the proceeds were used to fund investments in new products, markets and geographies.
Naveen Tiwari, Partner and Head, Carve-Out and Integration, EY India, said “Our experience indicates that divestitures are a good source of capital for investments in core business. Given functional interdependencies, legal, regulatory and tax issues, sellers need to be flexible in adopting different deal structures to meet value and time expectations from the divestment. They must continue to create value and put together a compelling story for different types of buyers, in order to maximize proceeds from the transaction. This indicates a need for a well-defined portfolio strategy, coupled with the right resources and expertise to manage divestments”
In our survey, 49% of the surveyed companies said that the lack of flexibility in the deal structure eroded value. Further, 28% of the surveyed companies indicated that optimizing the legal structure was the most important factor that enhanced value in their last divestment. 44% of sellers said it was a challenge to capitalize and operationalize a legal entity in their most recent divestment.
Companies today are broadly better at identifying assets that should be divested, but are increasingly slower in launching the process. In fact, according to the survey, 63% of companies said they held on to assets too long.
56% respondents also said that by not presenting the business as stand-alone entity ‘scared off’ potential buyers, or it prompted them to estimate more conservative stand-alone costs and offer lower bids. 40% of companies expected the number of buyers outside of their sector to increase, for e.g. Private Equity (PE). PE bidders assist sellers by bringing increased competition and a sharper focus on business value. 56% respondents said that PE involvement increased multiples during their divestitures.
Many companies miss out on opportunities to improve value in their divestment process. Our survey highlights that 65% of companies believe that they lost value by not fully developing diligence materials. 67% of respondents stated that the price gap between seller’s expectation and buyer’s willingness to pay was greater than 20%.
77% percent of sellers say that developing a realistic picture of stand-alone costs was a challenge and 35% of the executives also believe that well thought through stand-alone costs was a key piece of information for a PE buyer. A seller needs to build a compelling picture of the asset as a stand-alone business to maximize PE participation. It needs to keep an eye on operational performance and help the PE develop the exit strategy.
As per the survey findings, companies are more concerned about creating value from the divestment rather than the speed of the transaction. A better understanding of the sale process based on previous failures has driven this shift in the past three years. Our research indicates that in India, only 33% companies surveyed continued to create value in the business unit before the divestment, which is in sharp contrast to Americas (64%) and Europe (52%).
The report also highlights that analytics can help companies create value pre-sale. Those sellers that leveraged analytics in their pre-sale preparation said that analytics assisted them the most in making the divestment decision. 65% of sellers believe that advanced analytics would create even more value for them if it was used during buyer negotiation, such as highlighting growth opportunities from the buyers’ perspective.
About the Survey methodology
The EY ‘India Divestment Study’ 2019 is based on responses from more than 40 organizations in India, across sectors to gauge the success factors, challenges, collaboration landscape, and growth areas for divestments in India.
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