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EY: European companies are divesting to future-proof growth

According to the EY Global Corporate Divestment Study, 84 per cent of European companies surveyed intending to divest within the next two years (the majority planning to do so in the coming 12 months), executives are streamlining operating models for better agility.

2019-03-07 20:22:46

Executives are embracing divestment to strengthen their competitive edge and execute on their transformation agenda.

While geopolitical uncertainty dominates the headlines – from tariffs to trade wars, Brexit to border control – European companies are embracing divestment to strengthen their competitive edge and execute on their transformation agenda. Divesting non-core businesses is seen as a priority to secure a more nimble operating model that enables execution on their capital agendas.

According to the EY Global Corporate Divestment Study, 84 per cent of European companies surveyed intending to divest within the next two years (the majority planning to do so in the coming 12 months), executives are streamlining operating models for better agility. Accelerating corporate strategies to adapt to technology-driven business models is helping companies reposition themselves for future growth opportunities.

Digital disruption is fast-forwarding the pace of transformation. Seventy-four percent of European executives say that changes to the technology landscape are directly influencing their divestment plans. Executives predict that the number of tech-driven divestments will rise by 81 per cent in the coming 12 months – 50 percentage points up from last year, with 4 out of 10 respondents aiming to fund new technology investments from a divestment.

Executives divest to future-proof growth

Companies are increasing their rigor around portfolio management and sharpening their focus on building a growth strategy around core profitable operations.

With this, more companies are divesting for strategic reasons as opposed to shortcomings or failures in a business: European companies that cite a unit's weak competitive advantage as a driver in their latest divestment fell to 68per cent, down from 87per cent the previous year.

The second highest-rated driver for divestment is streamlining the operating model (65per cent), giving companies the ability to execute more nimbly on their capital agendas. Part of this equation is reinvesting the funds from a divestment to effectively strengthen a company's competitive edge. Sixty-one percent of European executives are prioritizing investing sale funds in new products, markets or geographies, with 58per cent investing back in the core business.

79 of companies say streamlining the operating model will factor into their divestment plans over the next 12 months.

Building the foundation to divestment success
Businesses increasingly realize that there are crucial steps in achieving a successful sale. Preparation is paramount. Regular portfolio reviews and use of analytics tools provide clarity of vision around an asset's state of health and divestment readiness.

The following are essential activities to pave the way for a successful divestment:
• Weighing the merits of different deal structures to deliver optimum value. A carve-out is the preferred approach for the vast majority of European respondents (75per cent), up from 48per cent last year. With alternative structures, such as partial divestments or joint ventures in second place (20per cent), down from 46per cent. This decrease may reflect the governance challenges that businesses can face when they partner with another company, particularly a previous competitor.
• Understanding and managing work stream interdependencies. This proved to be one of the biggest challenges for six out of 10 of respondents in developing their deal perimeter with more focus needed on highly-entangled areas such as IT, shared legal entities and shared services.
• Pre-empting regulatory hurdles. Sellers must identify regulatory requirements in every jurisdiction to set clear work stream timelines. Non-tariff barriers to success, including regulation, product standards and ownership rules, is cited by 45per cent of respondents as affecting their divestment plans.
• Executives name a number of other pre-sale activities to help unlock maximum value from a divestment. These include identifying and mitigating stranded costs and highlighting tax upsides to potential buyers, completing operational improvements to reduce costs or improve margins and preparation to mitigate price reductions for tax risk.
• Maximizing value by minimizing fatal flaws
• The price gap between what buyers and sellers expect has widened significantly. Two-thirds (67 per cent) of respondents report a gap of more than 20 per cent between sellers' expectations and buyers' offers, up from 22 per cent of respondents last year. And more than one-third (37 per cent) say that their most recent divestment did not meet their price expectations, up from 14per cent.

The lack of alignment in expectations may explain why opportunistic offers were a trigger for just 49 per cent of divestments, down from 73 per cent last year. If sellers are to avoid joining the 57 per cent of respondents who admit to holding onto assets for too long, it is even more important to build a credible value story tailored to meet the needs and interests of all potential buyers.

To maximize value sellers should:
• Bring analytics into buyer negotiations. Although 79 per cent of respondents used analytics in making their investment decision, the number using analytics to stress test data from a buyer's perspective fell to 44 per cent from 70 per cent last year. Over half of respondents (54 per cent) who didn't use analytics in buyer negotiations admitted that they wished they had.
• Offer potential buyers the reassurance of stand-alone operating models. Forty-one percent of respondents recognized that their failure to capitalize and operationalize stand-alone entities delayed or deferred asset closing.
• Demonstrate flexibility in operating models, deal perimeters and sale structures. Fifty-seven percent of respondents say that a lack of flexibility in the sale structure eroded the value of their last divestment.

Conclusion: Bright future prospects

Despite the headwinds, just 38 per cent of European companies now cite geopolitical uncertainty and macroeconomic volatility as the prime divestment trigger, down from 52 per cent last year. Prospects for future deals remain bright, with prices well placed to rise again. A significant number of European respondents predict that the level of strategic sellers, unsolicited approaches, and buyers from outside their sector will increase over the next year. They also foresee a rising incidence of industry consolidation (80 per cent, up from 67 per cent last year) and large transformational deals (74 per cent, up from 50 per cent last year). To leverage these positive opportunities, sellers need to look through buyers' eyes and deliver what they want to know and see. Crucially, they should streamline their operating model for agility, prepare assets for sale before the opportunity arises, and tailor their value story for all potential buyers.

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