In 2018 M&A is supposed to pick up, according to a variety of sources. Much of that will likely be divestitures. Companies are increasingly engaged in divesting activities and are doing it for a variety of reasons – whether due to shareholder activist campaigns, an attempt to get back to core businesses, risk mitigation or capital raising for future acquisitions or innovation. Whatever the case, it is more and more seen as an effective way to unlock significant value for shareholders.
“Divestment is increasingly seen as a key lever to deliver shareholder value and ensure strategic alignment,” according to recent survey from consultancy Deloitte. “Companies are reviewing their portfolios of assets and asking if they are the right owners of any given business. Where the existing portfolio is not delivering optimal shareholder value or does not have a clear strategic fit, the result is often a decision to divest under-performing or non-core assets. Companies then use the resulting additional time, resources, and capital to focus on growth activities.”
At several recent second-half NeuGroup peer group meetings in 2017, members stated that they’d just completed divestitures; in one case several years’ worth of them resulted in the discharge of multiple brands. One member said after their recent divestitures, their cash portfolio will increase substantially.
In the Deloitte survey, a third of respondents said their organizations “undertook more than one divestment in the last three years, and 70% expect to make at least one divestment in the next two years (with 15% expecting to undertake three or more). Yet even though divestment activity and intentions are strong, that doesn’t necessarily mean that deals are getting easier to transact.”
Deloitte says 54% of respondents said that coming divestments “will be more difficult to deliver in the next 12 months due to external market changes.” And that’s mainly uncertainty, Deloitte said. Companies are increasingly uncertain about the near future, which makes it harder to conclude deals. Uncertainty affects pricing and it affects the risk profile of the company buying the piece of the portfolio.
There is no way to predict the future of course, but as usual proper planning can help companies buy with reasonable confidence what many companies have to offer. It can also help companies selling parts of their portfolio do so in an effective way. One NeuGroup peer group member company includes in its M&A playbook a divestiture process timeline, including developing a list of possible customers for whatever business it is selling. It develops marketing materials, business plans and capital structure reviews. It also does due diligence on suitors to make sure any future offer is viable. Likewise, it also prepares for due diligence from those buyers, which includes getting all accounting and tax materials ready. There are pitch materials, plans developed to “motivate potential buyers” and finally, after several rounds of interviews, a negotiation of terms with the company that is the best fit.
It is a considerable amount of work, so companies must make sure it’s all worth it. “Sophisticated businesses are adapting their strategies to ensure they capture maximum value from these activities,” says Deloitte.