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Sellers driven by short-term fast cash, says Ernst & Young report

Nearly 50 per cent of divestments in the UK over the past two years were driven by a need for a quick cash injection rather than to achieve a longer term strategic objective, according to a report from Ernst & Young.

The 2012 Global Corporate Divestment Survey reveals that respondents’ rationale for a divestment is often focused on short-term financial motives rather than the longer term strategic benefit of the business.

Seven out of ten respondents say the main factor that determines whether a business stays within a company portfolio or not are short term financial measures. For example, whether an asset dilutes or enhances earnings per share (EPS), and how it performs against financial benchmarks such as return on capital employed (ROCE). Strategic drivers such as enhancing shareholder value or focusing on core business, come further down the priority list.

The survey, conducted by the Economist Intelligence Unit (EIU), is based on feedback from 600 senior corporate executives globally and 49 respondents in the UK, as well as a series of interviews with clients, investment banks and law firms.

Michel Driessen, operational transactions services partner at Ernst & Young who led the research, says: “The rationale for making divestments is shifting. Many UK companies are still using divestments as a short-term tool to raise cash or pay down debt. That’s not surprising given the difficulties many businesses have faced in terms of cash and credit over the past five years.

“However, some companies are now taking a more strategic and structured approach, viewing a divestment as strategically important as an acquisition.

“Those that divest strategically tend to exceed their value goals. The fact that 76 per cent of companies that divest leave money on the table will increasingly spotlight the benefits of a more strategic approach.  In this prolonged period of low – or even zero – growth, divestments will likely play a more important role in how companies navigate uncertainty, meet their strategic corporate objectives and create value for their stakeholders.”

Fewer than 50 per cent of businesses say that they are carrying out all of the key steps required to enhance the value story of their divestments. Even though more than 32 per cent of UK corporations are in the process of, or are planning to divest in the next two years and nearly 85 per cent plan to accelerate their divestment plan over the same period, more than half of those selling assets are not presenting their divestment as attractively as they could to the broadest range of potential buyers. As a result they are not maximising the value of their divestment.

Essential steps such as validating the market/product/growth story with independent review (57 per cent respondents), developing an M&A plan for potential investors (51 per cent) and providing their own view of synergy opportunities in the information provided to buyers (41 per cent) are being carried out by a minority of those businesses divesting.

Driessen adds: “Corporate sellers benefit by enhancing the value story of their divestments and tailoring them to the full range of potential acquirers. Today, buyers are more astute than ever, so sellers need to present their case in the most appealing way possible.”

Nearly half of UK respondents said they would ramp up their divestment activities if economic growth improved. 51 per cent of respondents from the EMEA region say that they would increase their divestment activity, but are holding back due to economic conditions.

Overall, many companies have chosen to prioritise operational improvements, cutting costs and increasing efficiency over divestments in recent years, waiting for the economy to recover.

Driessen says: “The challenging business environment is with us for the foreseeable future. In that context, a ‘wait and see’ approach to conducting any transaction is understandable. However, our research provides strong evidence that companies may be missing out by delaying divestments due to weak economic conditions.”

Supporting this view, 41 per cent said a high degree of competition in the M&A process helped drive up values.

When asked about their most recent divestment, only a fifth of global companies overall exceeded their expectations. Respondents with structured processes were more likely to have achieved strategic goals: 55 per cent divested ahead of time and exceeded price expectations. Of those divesting without structured processes, only 34 per cent met those expectations.

Sellers are also not always considering the full range of potential acquirers for their asset. Only a third of potential sellers consider overseas buyers in the same sector while just a fifth look to domestic buyers in a different sector. Only 19 per cent consider an overseas buyer in a different sector to be the most likely acquirer.

Corporate sellers could also benefit by looking beyond corporate buyers – for instance, no UK respondents would consider private equity a likely acquirer.

Driessen says: “Potential sellers maximise value when they make the asset attractive to a wide range of international buyers across a broad range of sectors, including private equity.”

The survey highlights principles and practices that will help ensure a successful divestment.

Driessen says: “For the first time we have empirical evidence that businesses which adopt strategic practices will extract greater value from a sale. Companies which exceeded their most recent divestment expectations in terms of timing and pricing were characterised by consistent practices: they widened the net, stood in the buyers shoes and had robust processes in place.”

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