More than half of companies (54%) engaging in divestments since 2010 have lost shareholder value, according to Willis Towers Watson’s Divestment Performance Monitor (DPM), in partnership with Cass Business School.
The new global database analyzes the share price performance of companies selling assets, from six months prior to the divestment announcement to up to six months after the divestment has completed, said WTW.
There are more than 5,500 divestment deals each worth over US$50 million in value completed worldwide from 2010 to 2018, with a combined value of US$3.9 trillion, the company added.
“Our data shows sellers continuing to struggle to create shareholder value from deals, as investors punish companies whose strategies and execution they disapprove of,” said Jana Mercereau, head of corporate mergers and acquisitions for Great Britain.
“The success of those asset sales that did add value is likely to have been advanced by the sellers’ ability to exploit their unique insight of the businesses being sold. This will have put them in a far stronger position to command the highest price by targeting buyers that have the most to gain and negotiating with them from a stronger position,” she noted.
Highlights of the monitor
- Sellers across the board struggling: The challenge of achieving value from sales during the last 10 years applies across all regions, deal sizes and industries.
- Sellers can succeed: An analysis of the study showed that the value added by the minority of successful sellers (US$2 trillion of outperformance from 45% of sellers) marginally exceeded the underperformance of the majority that struggled (US$1.9 trillion from 55% of sellers).
- The challenge when dealing with PE buyers: From 2010 to 2018, divestitures to Private Equity (PE) buyers (-3.3pp) underperformed those to corporate buyers (-2.2pp). While this can be partly explained by PE firms engaging with more distressed sellers, which may lead to lower returns, buy-side PE deal teams also tend to have deeper, professional transaction teams with regular deal flow, enabling them to negotiate harder.
The study also shows that many of the better performing separations have been spinoffs, which are often justified by segmenting a successful business to better demonstrate its value separately from the parent, WTW pointed out.
This supports the value of pre-deal preparation and the importance of business leaders engaging internally and externally on the rationale for the deal to clearly demonstrate the value of a division being sold and the prospects for the remaining business, Mercereau said.