Companies taking a “wait-and-see” approach to deal-making as economic uncertainty persists may be missing out on growth and value opportunities.
Many companies have looked to divestments to offset cash and credit challenges and to free up capital to drive growth. But this short-term thinking is shifting as companies plan for the long term and take a more strategic approach to divesting.
In a recent EY divestment study that surveyed almost 600 executives, 77 percent said they planned to accelerate divestments within the next two years, and 46 percent are planning to divest in the same time frame. As companies signal an increased appetite for divestitures, it’s important they understand and implement the appropriate steps to achieve greater value for shareholders.
Evidence from our study, combined with our work with clients, has shown that there are five leading practices that companies should follow in order to execute a successful divestment:
Conduct rigorous and regular portfolio management
Review your portfolio regularly. Companies can assess whether assets are contributing to strategic goals or if capital can be better used for other purposes.
Companies that use divestments as a strategic tool to enhance shareholder value or focus on core business strategies, rather than considering them as a reactive move to free up cash or pay down debt, tend to improve their divestment results.
Consider the full range of potential buyers
There is an intense amount of competition from buyers today for good, high-quality assets and they’re ready to transact. Appealing to a broad group of buyers can garner a price that exceeds expectations.
Companies should think about the buyer universe for a potential asset sale differently than they might have in the past, considering potential foreign buyers, buyers within different sectors and private equity firms. Each buyer may have different information needs that require a different planning process.
Articulate a compelling value and growth story
Sellers should provide tailored information about how an asset fits with the buyer’s business to help achieve strategic objectives. Develop an M&A plan for the asset or provide a view of synergy opportunities to buyers.
Effective ongoing preparation can instill buyer confidence. As a result, companies can better control the process and realize greater speed and value. Half of the executives surveyed admit that certain changes to the preparation process could have made a significant difference during divestment.
Understand the importance of separation planning
Probably the most crucial aspect of a divestment is separation planning, yet 56 percent of respondents identified a clear separation road map as the most complex part of the divestment.
Other separation challenges include decisions regarding the completion mechanism, tax planning, estimating stand-alone costs and negotiating transition services agreements.
Every day a company waits to evaluate its capital strategy, someone else is making a change and gaining an advantage.
In heeding these five key practices, companies can take a more strategic and ultimately successful approach to divestments to ensure they get the most value possible and grow the bottom line.
Paul Hammes is the Divestiture Advisory Services Leader for Transaction Advisory Services at EY. Reach him at www.ey.com.