LONDON, March 3, 2015 /CNW/ -- Divestments will be a core component of companies' capital strategy in the next year as management teams address pressure to improve portfolio performance and shareholder returns, according to EY's Global Corporate Divestment Study, Closing the deal: strategies to increase speed and value. More than half of executives (54%) expect the number of strategic sellers to increase in the next year.
For those willing to divest, buyers are on the hunt. Nearly half (42%) of companies expect the number of unsolicited approaches to increase in the next year. Given the potential benefits of divesting assets, 47% of companies say that even if they weren't looking to divest, they would be willing to sell at a premium in the range of 10% to 20% (and a third would go below 10%).
Divesting in order to grow
For many companies, divestments are a key path to achieving growth, and 74% of respondents used funds from their most recent divestment for growth. Specifically, 34% reinvested the funds back into the core business; 23% invested in new products, markets, or geographies; and 17% made an acquisition. The financial benefits of divestments are undeniable considering 66% of companies saw an increased valuation multiple in the remaining business after their last asset sale.
To stay competitive, many companies seek the flexibility necessary for growth by stripping down to their core strengths and offerings. Forty-six percent of executives initiated their most recent divestment because the assets were not part of their core business.
Pip McCrostie, Global Vice Chair, Transaction Advisory Services (TAS), EY, says:
"Reallocating capital from non-core to core business and core business adjacencies will be the name of the game in 2015. Mega trends such as sector convergence, technological change, cloud computing and digital are causing companies to continually assess their core businesses and value chains. The result may lead to an unprecedented level of portfolio turnover."
Activist shareholders driving divestment activity
Shareholders' demands will continue to be a major divestment driver this year. Forty-five percent of participants indicate that investor activism influenced their most recent decision to divest.
Paul Hammes, Global Divestiture Advisory Services Leader, EY, says:
"Shareholder activists are bolder than they have ever been, and they leave no stone unturned in their hunt for untapped value. Divestments will continue to be fueled not only by activists' demands, but as a result of management teams' preemptive portfolio reviews and ongoing portfolio fine-tuning."
Thorough preparation is a must
The study revealed that while many executives follow best practices for portfolio review, 58% acknowledge that they do not conduct reviews frequently enough and 56% report that better industry benchmarks would improve their review process.
At the same time, 55% indicate that business analytics would make their portfolio assessment more effective. Companies whose divestments resulted in higher valuation multiples on their remaining business were 58% more likely to have used strong analytic tools than lower-performing companies.
Hammes says: "Without diligent, frequent portfolio reviews that involve concrete data and advanced analytics, companies make themselves vulnerable to shareholder activists. More importantly, executives wind up leaving money on the table if they do not prepare for a sale properly and deliberately."
Old growth strategies are no longer appropriate
Hammes says: "As the global economy settles into its new growth pattern, the winners will be companies that recognize when their old growth strategies are no longer appropriate and make informed decisions tied to portfolio rebalancing. Across industries, our survey found that half of executives say that closing deals quickly and with certainty is more important than waiting longer to secure a higher price. However, speed and value are not mutually exclusive. Successful divestments achieve optimal value as a result of advanced planning that includes regular portfolio reviews, sophisticated analytical tools and a thoughtful divestment roadmap."
Companies have a strategic imperative to make portfolio decisions now. While nine industries are represented in the Global Corporate Divestment Study, six key sectors are discussed in more detail in our spotlight reports: consumer products, diversified industrials, financial services, life sciences, oil and gas, and technology.
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