Record number of companies planning to divest in 2018, says EY

09 April 2018 Consultancy.uk

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.

Companies that expect to initiate their next divestment within the next two years

“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.

Which triggers prompted your most recent major divestment and Which of the following geopolitical shifts may affect your plans to divest

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.

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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.