The number of companies with plans to divest is near record levels as they streamline to compete, according to EY Global Corporate Divestment Study 2019.
Results of the annual survey of more than 900 global executives indicates that 84% of companies plan to divest within the next two years.
In addition, 81% of respondents say streamlining their operating model will impact their divestment plans this year, demonstrating a growing desire for companies to be more agile as they face new and existing competition.
“Companies must balance the need to react quickly in the face of change with the need to take the necessary time to prepare for divestments that can drive stronger long-term performance,” said Paul Hammes, EY Global Divestiture Advisory Services Leader. “
Within the next 12 months, 70% of companies expect large-scale transformational divestments, up from 50% in 2018, EY said.
Companies that cite a business unit’s weak competitive advantage as a driver in their latest divestment (a reactive decision) fell significantly to 69% from 85%, according to the survey.
Firms have grown more accustomed to geopolitical uncertainty
The number of companies that say macroeconomic and geopolitical triggers will factor into divestment decisions has dropped to roughly half (51%) from 62% in 2018, EY said.
Companies may have grown more accustomed to global uncertainty: 74% still expect geopolitical shifts to push operating costs higher, and 69% wonder whether they can expect existing cross-border trade agreements to remain intact, the firm added.
Technology blends sectors, sparks divestment activity
Sector convergence is more likely to drive the divestment decisions of 70% of executives, according to survey results.
They can no longer rely on old playbooks to remain competitive. To that end, 80% of companies expect the number of technology-driven divestments to rise in the next 12 months, compared with 66% last year, EY noted.
In addition, 60% of companies reinvested proceeds from their last divestment into new products, markets and geographies. This strategy helps companies better respond to cross-sector opportunities and can create longer-term value for shareholders and the company, EY observed.
Selling with a private equity buyer in mind
According to the survey findings, having a strong value story, backed by early preparation that will address the questions of a broad buyer pool, is more important than ever.
Slightly more than two-thirds (67%) of sellers say the price gap between buyers and sellers is greater than 20%, survey results indicate.
Last year, only a quarter of sellers reported such a gap, EY said.
"A target operating model is especially important to private equity (PE) buyers that have plenty of capital to deploy but lack business synergies. Therefore, instilling confidence that the carve-out has been fully prepared for separation," EY pointed out.
One-quarter of PE firms say a well-thought-out, stand-alone case and a related cost model are key to keeping them in the sales process while half say access to granular data has been a key factor in their decision about whether to stay in an auction process, EY said.
Detail is important, but so is accuracy: 39% of PE bidders say that if the business misses forecasted performance, they would drop the price or walk away, EY said.
“Corporates need to approach the divestment market with the needs of a private equity buyer in mind. Private equity firms compete hard for quality assets, but corporates need to come to the table with the right story – and supporting facts – to make buyers comfortable with their decision to move forward,” said Hammes. “Overlooked details or unfounded optimism can quickly trigger a loss of confidence.”