Divestments in technology industry soar on the back of digital disruption

20 March 2017 Consultancy.uk
Divestment in the technology sector soared last year on the back of mega carveouts and increased scrutiny of assets. A new report considers the trends related to portfolio analysis, sales activities and their key challenges.
 
Divestment within the technology sector has reached ‘unpresidented levels’ according to an analysis from EY in its ‘Technology Global Corporate Divestment Study 2017’ report. The study is based on more than 900 interviews with corporate executives, and considers the wider implications of divestment within the sector as well as the key reasons for such moves.
 
Levels of divestment last year, for carveouts valued at more than $100 million, came in 37% higher than in 2015, while the ‘mega-divestments’ segment, deals worth more than $1 billion, rose by 300% last year to a total of 28 transactions. Divestment deals in the ‘mega’ class included Hewlett Packard Enterprise’s carveout of its software and services businesses, Softbank divestment of its 72% stake in Supercell and Dell selling its IT services unit to Japan's NTT Data.

Key industry trends impacting the decision to divest

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.

Key challenges faced in implementing portfolio reviews

Main challenges

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.

Which of the below do you consider a challenge associated with your portfolio reviews

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’.

Pre-sale value creation initiatives undertaken

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.

What are the top challenges to divestment in the tech industry

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.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.