Record number of companies planning to divest in 2018, says EY
A number of companies are planning their business or parts of it in 2018, as they navigate ongoing macroeconomic and geopolitical issues and face intense pressure to evolve their business models to stay ahead of the curve. As a result, divestments are at record levels as they increasingly becoming an integral part of growth and transformation strategies.
Business models in almost every industry are changing, and as companies revisit their business model they are keeping a more open approach to divesting non-core or non-competitive areas. According to a study by EY, based on a survey of 1,000+ senior executives and private equity managers, the number of companies planning their next divestment within the next two years has reached the highest point in years. Globally, 87% of respondents said they are eyeing a divestment, with the EMEA region the most primed for activity (90%), followed by the Americas (85%).
The key divestment driver continues to be a business unit’s relative weakness in competitive position in its marketplace – cited by 85% of companies, up from 49% in 2017. Following an opportunistic strategy is the second most cited reason. With corporates increasingly indulging in corporate venturing, and dry powder reaching a record high of $1,700 billion according to a recent Bain & Company report, the probability that companies are approach opportunistically is at a high.
“In an M&A environment fueled by record levels of private equity dry powder and large corporate war chests, divestments prompted by opportunistic unsolicited bids are up from just 20% in 2014 to 71% in 2017,” said Paul Hammes, EY’s Global Divestment Leader.
Geopolitical uncertainties / macroeconomic volatility comes in third at 47% of respondents, with labour and immigration laws likely to be key determinants, as various regions are increasingly hostile to migrants upon which many businesses are, in part, dependent. “A staggering 86% of companies cite labor and immigration laws as a geopolitical trigger affecting their future divestment plans. The recent populist movement away from foreign labour to local workers is leading to policy shifts, particularly in the US, UK and Australia,” explained Hammes.
Tax policy comes second, as tax can make divestment plans less viable or, alternatively, offer new opportunities to improve value. Globally, 80% of companies highlighted tax policy changes as one of the most significant geopolitical shifts that may affect their plans to divest. Trade agreements are cited too, with increasingly fraught relations – including talk of trade wars – impacting cross-border trade. Brexit is its own storm, which, while contained in a teacup for the Americas and the Asia-Pacific on the mainland and the Islands itself, 69% of EMEA respondents noted it as a key factor for divestment planning.
Using divestment for investments
Half of companies (50%) planning a divestment intend to use the proceeds to fund investment in new technology. This strategy makes sense, according to EY, as “companies who divest in order to focus on top-performing assets, particularly where new technology can provide a competitive edge, are 21% more likely to achieve an above expectation sale price than opportunistic divestments.”
Moreover, companies that divest to fund new technology investments are 48% likelier to achieve a higher valuation multiple on the remaining business post-divestment than those that divest opportunistically.
The results of EY’s study are broadly in line with a recent report by Big Four rival Deloitte, which found that 70% of businesses expect to make at least one divestment in the next two years. However, the researchers also warned that delivering the business case of divestments is becoming increasingly challenging.
Related: Parthenon-EY: Divestments can help technology firms bolster operations.
