-- 49% of companies plan to divest within the next two years
-- 70% of corporates use divestments to fund growth
-- Access to data is the biggest portfolio review challenge
LONDON, Jan. 25, 2016 /PRNewswire/ -- Divestments are top of mind in corporates' capital agenda strategy this year as companies seek to extract maximum value from strategic sales, according to EY's 2016 Global Corporate Divestment Study, Learning from private equity: experts at extracting hidden value, an annual survey of corporate and private equity executives.
Reflecting the increasing focus on M&A as a route to reshaping businesses, 49% of companies are now planning to divest within the next two years – a significant increase from the 20% reported in last year's survey. Only 5% of companies do not expect to make any divestments in the next two years compared to 56% in 2015. This suggests a greater appetite to strengthen and remodel core businesses in a rapidly changing environment.
Divestments are increasingly being employed as an essential path to growth, with 70% of companies using them to grow their core business, invest in new products and markets, and acquire a complementary business. Among companies that completed a divestment last year 39% re-invested the divestment proceeds back into the core business, 20% invested in new products, markets or geographies and 11% made an acquisition. Overall, 84% said they believe it created long-term value in the remaining business.
Pip McCrostie, EY's Global Vice Chair – Transaction Advisory Services, says:
"Divestments are a strategic route to generate long-term growth. They are increasingly being used to fund new opportunities, to stay ahead of changes in consumer preferences and to drive innovation. Astute reallocation of capital and a disciplined review of portfolio assets will be a priority in 2016."
Opportunistic divesting still main reason for sale
Companies who used their last divestment to fund an acquisition were most successful: they were 62% more likely to have experienced a higher-than-expected valuation multiple on the remaining business post-sale than a company that used the funds to pay down debt. For companies that divested 10% of their enterprise value, the markets have reacted favorably, with stock prices for these companies outperforming the public index by 612 basis points more than they did in the one-year period pre-sale. For those that divested 20%, the numbers were even more favorable, outperforming the previous year by 1,104 basis points.
Opportunistic divesting – including unsolicited approaches – is still the main reason for the sale with almost a third (31%) of companies taking this route. The survey finds that an opportunistic divestment is least likely to positively affect the remaining company's valuation multiple after the sale.
Paul Hammes, EY's Global Divestiture Advisory Services Leader, says: "With markets rewarding divestments that represent bold portfolio decisions and strong strategic rationale, all signs point to a strong 2016 ahead. That said, maximizing the value of a divestment is firmly rooted in having an in-depth understanding of the business's value. Too often, sellers leave money on the table, particularly when they are enticed by unsolicited offers."
Access to data the biggest portfolio review challenge
Forty-nine percent of respondents say access to accurate and comprehensive data is a major portfolio review challenge, according to the survey. Patchy data is the biggest cause for divestment dilemmas, with 81% of executives indicating that poor-quality data makes it difficult to use analytics effectively. Additionally, 42% of executives say they need to apply sophisticated analytical tools to their portfolio review processes to measure performance.
Hammes says: "Information is how value is realized or lost in the age of cloud computing, Internet of Things and big data. You need to know your business better than anyone else. Looking at what outside influences know about your company, say about its good or services and how these insights might lead to growth prospects or vulnerabilities will help ensure you sell your company at the right time for the right price."
The survey finds that priority analytics capabilities are not areas of strength for respondents. For instance, 65% say their social media and customer perception analysis is very ineffective. Social media is being largely overlooked, but 19% of corporates expect to invest in this capability in the coming two years.
Disciplined approach yields success
The survey findings clearly indicate that companies that divest strategically – including reviewing portfolios, preparing assets for sale and carefully considering how to use sale proceeds – are much more likely to execute divestments that positively affect their remaining business over the long term. Fifty-six percent of corporate respondents say shortcomings in the portfolio review process resulted in failure to achieve intended divestment goals, with 44% indicating one of the biggest obstacles is making the portfolio review a strategic imperative. The survey found a clear link between frequent portfolio reviews and divestment success. Among the respondents who experience high-performing deals, 48% carried out reviews quarterly and 37% annually.
Underscoring the value of well-prepared divestments, 75% companies generate a sale price above expectations when they focus on creating value before the sale, and 33% of companies generate a sale price above expectations with an operational separation plan.
Shareholder activism continues to prompt divestments
Reminiscent of 2015, shareholder activism continues to drive divestments. The survey finds that investors are more likely to positively perceive an activist-triggered divestment compared to opportunistic divestment. Divestments are the second most frequent change sought by activists and 51% of high-performing deals were triggered by shareholder activism-related concerns in the last year.
Hammes says: "As we look ahead to 2016, the continued pressure to fuel growth – amplified by bold and aggressive activist investors who quickly look to divestments for value – will not go away. With limited time and resources, corporates must carefully deploy all available tools – from advanced analytics to regular portfolio reviews – to uncover a dynamic 'value story' for today's discerning buyers. If executed properly, this front-end planning can lead to significant long-term success."
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