Despite an anticipated rebound in corporate divestment activity, global executives admit that realizing the benefits of the divestments they pursue has been challenging, according to the EY 2021 Global Corporate Divestment Study.
Nearly 8 out of 10 respondents (79 percent) say that they failed to meet price expectations in their most recent divestiture. At the same time, more than three-quarters (77 percent) of respondents say that shortcomings in portfolio or strategic reviews have resulted in failure to achieve intended divestment results. In addition, 56 percent of respondents say that their most recent divestment did not generate the valuation multiple impact for RemainCo that they had planned.
The annual survey of more than 1,000 global C-level executives shows more companies than ever (78 percent) in the study’s nine year history hold onto businesses that, once critical to a portfolio, are now an unnecessary draw on resources and utilization of capital that could be better deployed elsewhere. Despite these challenges, as companies face tougher capital allocation decisions in a disrupted business environment, a majority of respondents (76 percent) expect the continued effects of the COVID-19 pandemic to accelerate divestment plans, with 56 percent planning to initiate their next divestment within two years, taking advantage of the opportunities provided by a robust M&A market.
Rich Mills, EY global and Americas sell and separate leader, said, “Too often divestment decisions are based on short-term financial factors, which often result in poor deal performance. In truth, divestments should be closely aligned with the overall corporate strategy and seen as an opportunity for even greater transformation. Issues such as investing the funds following a divestment in technology or additional capabilities to give the remaining business a competitive advantage, or the impact of a divestment on the future operating model of the business should be central to the decision-making process. Understanding a divestment’s role in strategy is critical to capturing new growth and increasing stakeholder value and our survey shows respondents now better understand the importance for executives to create a stronger link between the two.”
Environmental, social and governance (ESG) factors are playing an increasing role in driving divestment activity. Nearly half (46 percent) of sellers say ESG issues directly influence their divestment plans, with ESG being a much bigger factor in Asia-Pacific (84 percent) than in EMEA (47 percent) and the Americas (14 percent). These findings align with M&A data for Q1 2021 that shows ESG and renewables related deal values in the first quarter alone being three times higher than in the whole of 2020. Regulatory changes that require companies to reduce their carbon footprint might factor more heavily into divestment decisions in Europe, while companies in the Americas might ponder the impact on management and workforce diversity, when carving out or spinning off a business.
The EY survey also found that nearly all company respondents (94 percent) confirm that changes to the technology landscape are directly influencing divestment plans, up from 59 percent before the COVID-19 pandemic. Two-thirds (66 percent) say their most recent divestment was triggered by suboptimal returns in the divested business. Funds raised by divestment have flowed to technologies that support core capabilities (79 percent) and new markets, products, or geographies that better position RemainCo (65 percent).
Andrea Guerzoni, EY global vice chair of strategy and transactions, said, “Triggering events like the pandemic are firmly positioning long-term value creation at the core of corporate strategy. CEOs can rally employees, customers and investors behind divestments by demonstrating the link between the portfolio change and how it supports the company’s strategy and broader considerations such as ESG, an increasing deal driver. Stakeholders may rally behind a divestment decision that demonstrably aligns with wider responsibilities and requirements while also freeing up capital to invest in such areas as technology that can help increase operational efficiencies, improve the customer experience and streamline decision-making.”