Parthenon-EY: Divestments can help technology firms bolster operations

04 September 2017

Despite unprecedented divestment activity in the technology industry, many companies in the technology sector still aren’t fully benefiting from using divestitures as part of a broad strategy to position themselves better for coming disruptions. According to Barak Ravid, a managing director at strategy consultancy Parthenon-EY, divestment of non-core units can serve as an effective way to streamline the business and free up capital to support growth.

Analysis from EY shows that the volume of global tech company divestments valued over $100 million grew 37% from 2015 to 2016 — and the trend is magnified for divestments of over $1 billion, which rose by 300% to a global total of 28. Many large tech firms made bold, strategic decisions to shed non-core assets. These included some of the industry’s biggest names: Hewlett Packard Enterprise carved out its software and services businesses in separate multibillion dollar mergers, and Dell sold its services business for $3 billion. 

However, according to a global survey of 900 respondents across all industries, fewer tech firms are planning further divestments in the near future than companies in other industries. Just 28% of the 182 technology executives surveyed said they expect to make divestments in the next two years — much lower than the 43% across all sectors.

Technology divestment strategy

Perhaps they should reconsider. At Parthenon-EY, it is believed the same trends that drove divestments in 2016 are set to continue, and in some cases intensify in 2017 and beyond. In most industries, many large companies have reinvented themselves more than once to maintain their leadership over the decades. As part of each transformation, they have typically divested non-core assets while making growth-focused acquisitions. 

In contrast, the technology industry has historically been much more focused on growth than on reinvention — and accordingly, has placed much more emphasis on acquisitions than on divestments. This is partly because the technology industry is still relatively young, as are many of its leading companies. Robust corporate growth can tend to paper over the cracks in a company’s portfolio: when parts of the industry are growing at 20% to 40% a year, it’s easy to see why difficult divestment decisions get put off. 

Now, though, many large technology firms are several decades old, and have reached a point where they need to be more proactive in trimming and reinvigorating their portfolios. The pace of innovation and market change is increasing, shortening technology cycles and putting pressure on companies to reinvent themselves more quickly to keep up. 

Technology-led disruption

As one wave of innovation peaks — driven by cloud computing, mobile devices, and analytics — the next transformative wave is already building, based on such technologies as machine learning and augmented reality. Many companies find that their portfolios include aging assets that cannot easily be adjusted to these innovations, such as older software applications not designed for delivery in the cloud or as a service. While they may still be valuable in the right context, these older assets can slow growth and create a drag on business performance.

Divesting these non-core units is an effective way to streamline the business and free up capital to support growth, including acquisitions that position companies for the next wave of disruptive forces.

Strategic triggers for divestment

At the same time, the pool of potential buyers for technology assets is growing ever larger, driving up the value of divestments. Private equity firms have become a powerful force in technology deals — PE tech acquisitions rose 61% in 2016 to reach a record $90.1 billion, according to EY research — and they still have record stockpiles of cash to invest. They have also become increasingly comfortable with buying “hidden gems” — non-core businesses within larger companies that may be underperforming because of a lack of funds and corporate attention. 

This unprecedented confluence of driving forces means that CFOs and other executives at tech companies should be investing even more time and attention into evaluating their portfolios and determining where rationalization makes sense. 

A proactive, strategic approach to portfolio review — based on a longer-term view of industry trends and their effect on business performance — can identify parts of the portfolio that weaken growth and profitability. A recent EY capital budgeting survey found meaningful differences in capital allocation between well-positioned and poorly positioned technology companies.

Given the fast pace of the technology industry, well-positioned companies pursue a more fluid, decentralized process, budget more frequently, and use a predictive rather than a reactive focus that helps them proactively adjust the company’s business to the changing environment.

Portfolio review

Still, amid the intensive deal activity in the technology sector, many companies find it challenging to dedicate specialised resources to portfolio review. C-suite involvement can help ensure the business mobilizes the required resources, including people who have suitable expertise combined with a sufficiently independent perspective.

Portfolio review capabilities

Once a potential divestment has been identified, doing the heavy lifting of sale preparation is essential to maximize value. In general, the more prepared you are the higher the value you are likely to achieve. In contrast, inadequate preparation is a recipe for value erosion.

But sale preparation may take considerable work. At many technology firms, assets tend to be integrated into the overall business rather than operating as standalone units. It is important to clearly position the asset, define its perimeter, and be able to explain the factors that affect its performance so that buyers quickly get a clear picture of their potential acquisition.

Our survey showed that the technology sector lags others in this all-important sale preparation. Only 38% of  tech companies created a standalone operating model for divestments, compared with half of the executives across all sectors responding to the global survey. Further, this was the step that tech executives most regretted not taking — more than a third felt it would have provided the greatest benefit to the divestment outcome. 

Successful divestment involves navigating myriad complexities, such as solving intellectual property issues, avoiding disruption for large enterprise-wide customers, managing the separation of employee teams, and protecting the interests of all stakeholders including the employees who will transfer to the new owner.

Enhancing sale value

Among the many potential obstacles, untangling intellectual property (IP) issues can rise to the top, cited as a challenge by 80% of executives. Tech companies often have complex webs of cross-licensing agreements stitched together over many years, including agreements with competitors or even potential buyers. It’s important to identify ownership and devise workable solutions as early as possible, to avoid problems later. 

The accelerating pace of technology change will require many tech companies to reinvent themselves, just as other sectors have been forced to do. Divestments may be more difficult and time-consuming than acquisitions, but they are essential to streamline the business and free up capital for growth.

Tech companies that continue to serially acquire without engaging in healthy portfolio pruning will be less prepared to lead as a wave of disruptive forces reshapes the technology sector — again.

Related: M&A deal activity likely to remain robust on corporate growth demand.


Four ways digitalisation is transforming car brands and dealers

16 April 2019

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”