Divestment intent remains near record levels

Companies are now divesting businesses to gain competitive advantage, especially in the face of changing technology, customer tastes and shareholder pressure, according to EY Global Corporate Divestment Study 2019.

84% of companies plan to divest by 2021, up from 43% two years ago
81% say that desire to streamline operating models will impact divestment plans
70% expect large-scale transformational divestments, up from 50% in 2018

The annual survey of more than 900 global executives shows the elevated environment for divestment activity is poised to continue, with 84% of companies planning to divest within the next two years.

More than four out of five companies (81%) 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.

Divestments are more likely to be proactive, high-impact initiatives than reactive responses to change, the survey shows. Within the next 12 months, 70% of companies expect large-scale transformational divestments, up from 50% in 2018. Companies that cite a business unit’s weak competitive advantage as a driver in their latest divestment fell significantly to 69% from 85%.

Geopolitical uncertainty accepted as an unpredictable factor in decision-making

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. 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.

Technology blends sectors, sparks divestment activity

Sector convergence is more likely to drive the divestment decisions of 70% of executives. 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.

Sixty (60%) percent 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.

Sell 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%; last year, only a quarter of sellers reported such a gap. A target operating model is especially important to private equity (PE) buyers that have plenty of capital to deploy but lack business synergies.

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, and half say access to granular data has been a key factor in their decision about whether to stay in an auction process. 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.

Commenting on the findings of the report, Stelios Demetriou, Partner and Head of Transaction Advisory Services, of EY Cyprus, said: “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. 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.”