The research identified a number of key reasons for divestment within the segments surveyed. Top of the list is digital transformation, cited by 48% of respondents as their top choice, and 32% and their second choice. Underlying technology industry trends, from big data to blockchain, holds second place, representing 35% of respondents’ first choice and 31% of their second choice. Industry convergence comes third, cited by 10% as their first choice and by 12% as their second choice.
The research shows that while divestment has increased, companies remain considerably more focused on acquisitions. A recent, broader report from EY, on M&A activity in the technology sector, found that deal activity grew to a total of $466 billion last year.
Divestment related activity can be a time consuming and intensive process, requiring input from multiple stakeholders, as well as clear strategic pros and cons for going forward with the move. As technology companies tend to be focused on growth, rather than carving out parts of their operations that may contribute to overall revenue and profit growth, the reasons to divest tended to be undertaken to counter market pressures.
The rapid change within the wider industry however, is creating new pressures to identify the long-term viability of early businesses or functions before they, for instance, become obsolete. Carving out such businesses while they still retain value to a company better positioned to transform them, creates value on both sides – although it too demands that companies invest time to critically assess the value of their respective assets.
Against the backdrop, respondents were asked to identify their key challenges in implementing portfolio review findings. The biggest challenge noted (56% of respondents) is ‘allocation of sufficient time and resources to appropriately evaluate/implement findings’, followed by (44%) ‘short-term risk of reduced profitability due to reduced investments in legacy/non-core business’. Other areas of concern noted include ‘significant R&D investment required to entry into new technologies’, cited by 37%, and ‘lack of funding sources’, cited by 36% of respondents.
In terms of specific challenges faced by respondents when it comes to portfolio reviews, ‘dedicating specialised resources to the process’ looms large, at 54% of respondents, followed by ‘making the portfolio review process a truly strategic imperative’, cited by 48%. Other issues noted by respondents include ‘our ability to analyse and interpret data in a meaningful way’ (46%), ‘understanding the new disruptive forces that impact value in our business’ (45%), and ‘better communication between boards or strategy teams and M&A teams’ (42%). The area of least concern (30%) is ‘overcoming emotional attachments to assets or conflicts of interest’.
In the case a strong candidate for divestment has been identified, the consulting firm asked respondents to indicate the pre-sale value creation initiatives the companies undertake. ‘Presenting the synergy opportunity for each buyer’ comes in highest, at 74% of respondents, followed by ‘highlighting tax upsides to purchasers’ (73%). Other moves include ‘extracting working capital’ (69%), ‘operational improvements to reduce costs/improve margin’ (68%), and ‘enhancing revenue’ (61%). Providing ‘prepared vendor due diligence reports’ follows, mentioned by 37% of respondents.
When it comes to the top challenges faced by companies selling one or more of their assets, intellectual property issues loom large – since it is often difficult to extricate intellectual property used across a business from units. In 2016 61% of respondents noted it as their top choice and 19% as their second choice. Tax considerations were cited by 14% of respondents as their top choice, and 12% as their second to top choice, down from 2015 when 25% indicated it as their top choice. Other areas noted as a concern for companies include ‘separating combined sales initiatives for integrated offerings’ 27% total first and second choice, and ‘unwinding customer contracts’ at 25% first and second choice.
Commenting on the report’s findings, Barak Ravid, Managing Director and Co-Head Technology at Parthenon-EY, says, “Divestment of non-core businesses is an effective way to streamline the core business and raise needed capital to support growth. Those who continue to serially acquire without engaging in healthy portfolio pruning will be less prepared as the next wave of disruptive forces – including machine learning, intelligent things, blockchain and augmented reality – reshape the technology sector.”