While companies for years have generally underperformed stock markets after divesting significant assets, that tendency was severely pronounced in the first six months of both 2018 and 2019.
According to a study of 251 divestitures with a value of at least $50 million that closed in the first half of this year, 63% of divesting companies underperformed MSCI World Index industry benchmarks. The average underperformance was 7 percentage points.
In last year’s first half, the average market underperformance was 7.6 percentage points. The two figures were the largest for any half-year period since 2010, when Willis Towers Watson and Cass Business School began conducting a biannual study of divestitures.
The average underperformance in the wake of such deals across the 10-year period has been 2.8 percentage points. In the second half of 2018, it was 5.2 percentage points.
The study measures the percentage of change in sellers’ share prices from six months prior to deal announcements until the end of the half-year period in which deals are completed. Deals with private equity sellers are excluded.
There’s an irony at work here: while investors in divesting companies often take a hit subsequent to these deals, it’s investors themselves that often push for them.
“Companies are under pressure to reassess their businesses from a strategic perspective,” says Duncan Smithson, senior director, mergers and acquisitions, for Willis Towers Watson. “We’ve seen a rise in activist investors pushing companies to unlock value. Whether or not a company agrees, investors may see some assets as non-core.”
Companies response to such pressures may be driving some of the underperformance, Smithson suggests. “They may arguably feel forced to move more quickly than they would need to in order to properly prepare,” he tells CFO.
There was a relationship in this year’s first half between the size of divestments and their impact on the stock performance of divesting companies. Those divesting 5% or less of their total company value underperformed their markets by an average of 0.8 percentage points. That widened to underperformance of 6.9 percentage points for companies divesting 5% to 15% of their value and 6.3 percentage points for those divesting more than 15% of their value.
Divestitures that took the form of spinoffs did far better than asset sales to other companies in this year’s first half. After completing spinoffs, companies’ stock actually outperformed the MSCI World Index by an average of one percentage point.
On the buyer side, 53% of companies that acquired divested assets in the first six months of 2019 outperformed their industry benchmarks, also by an average of one percentage point.
“At most large companies, the finance, legal, and HR teams have a depth and breadth of experience and good skill sets in buying other companies or business units,” says Smithson. “But the processes they have in place for divesting assets are generally not as good.”