Ready, Set, Divest!

“Reallocating capital from non-core to core business and core business adjacencies will be the name of the game in 2015,” says an Ernst & Young chair.
Katie Kuehner-HebertMarch 3, 2015
Ready, Set, Divest!

More companies will divest units and assets to boost the bottom line and shareholder returns – and there will be more buyers “on the hunt” trying to scoop them up, according to Ernst & Young’s global corporate divestment study, released Tuesday.

More than half (54%) of roughly 800 executives surveyed said they expected more strategic divestments in the next year, and 42% said they expect the number of unsolicited approaches by buyers to increase during that time.

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divestitureEven if they weren’t considering divesting assets, 47% of the respondents said they would be willing to sell noncore assets at a premium of 10% to 20%, and a third would go below 10%.

Nearly three-quarters (74%) said they used funds from their most recent divestment for growth, with 34% reinvesting the funds back into the core business; 23% investing in new products, markets, or geographies; and 17% acquiring other companies.

Two thirds (66% ) saw an increased valuation multiple in their remaining businesses after their last asset sale, as investors viewed the companies as more competitive because they were now focused on their core strengths and offerings, Ernst & Young said.

“Reallocating capital from non-core to core business and core business adjacencies will be the name of the game in 2015,” Pip McCrostie, Ernst & Young’s global vice chair, transaction advisory services, said in a press release.

“Mega trends such as sector convergence, technological change, cloud computing, and digital are causing companies to continually assess their core businesses and value chains. The result may lead to an unprecedented level of portfolio turnover.”

Activist shareholders are also driving divestment activity, the survey found. Nearly half (45%) of respondents said that investor activism influenced their most recent decision to divest.

“Without diligent, frequent portfolio reviews that involve concrete data and advanced analytics, companies make themselves vulnerable to shareholder activists,” said Paul Hammes, global and Americas divestiture advisory services leader. “More importantly, executives wind up leaving money on the table if they do not prepare for a sale properly and deliberately.”

While many executives follow best practices for portfolio review, 58% of the survey’s respondents acknowledged that they did not conduct reviews frequently enough and 56% said that better industry benchmarks would improve their review process. Moreover, 55% said that business analytics would make their portfolio assessment more effective.

“Companies whose divestments resulted in higher valuation multiples on their remaining business were 58% more likely to have used strong analytic tools” the Ernst & Young report said.