Given recent market turbulence and economic uncertainty, companies can benefit by weighing what still fits and will create value for shareholders — as well as what needs to go and will generate more value under new owners.
As a defensive measure, companies are considering divestitures of non-core assets, to enhance their portfolios for the long term. They may be adjusting their portfolios in order to free up capital to invest in newer technologies related to automation or cleantech. Or, they might simply be interested in selling off assets in order to raise cash, pay off debts, and strengthen the company’s financial position as it faces further market upheaval.
Market data shows the pace of corporate divestitures has accelerated significantly, with the number of divestitures completed globally more than doubling from 2020 to 2021. In Deloitte’s 2022 survey, corporate leaders report they’ve done more divestiture transactions in the recent past and expect to do more in the future.
Understanding the Current Divestiture Landscape
According to Deloitte, respondents in this year’s survey are carrying out significantly more corporate divestitures. Asked how many divestitures they have done in the past three years, 51% reported three or more, and another 30% reported two. This is a substantial change from 2020, when just 32% reported three or more, and from the 2017 survey in which 14% reported three or more divestitures and a majority reported just one.
Why the increased divestiture activity? The top reason respondents to the Deloitte survey cited as a motivation for a divestiture is a change in the market landscape. Separately, 79% of survey respondents claimed the pandemic exerted a high or moderate influence on divestiture strategy.
As for which businesses or assets to shed in a divestiture, consultants like PwC suggest that senior leadership review portfolios to assess which businesses are core and which ones no longer fit. Non-core assets are typically good candidates for divestitures; however, the new capital can be deployed to create value by transforming business functions through new technologies or ESG capabilities.
In this way, divestiture is less about getting rid of underperformers and more about diverting capital to the more strategic parts of the business.
Top Considerations in a Divestment Strategy
Unfortunately, effective divestment strategies aren’t easy to figure out or carry out. EY’s 2021 Global Corporate Divestment Study revealed that companies across the globe fail to meet expectations for the price, timing, and valuation impact of divestments on the remaining business.
Indeed, according to EY, 44% of CEOs say they have difficulty explaining divestment rationale to the board and key stakeholders. Additionally, 59% of CEOs acknowledge they should provide better guidance on what they regard as core and non-core business.
When deciding which business unit or product/service line to divest, senior leadership can incorporate some of these considerations in their decision-making and communications.
Traditional Reasons for Divestitures
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from senior leadership’s decision to cease operating a business unit or selling a particular product or service because it is not part of a company’s core competency, notes Investopedia.
However, divestitures aren’t always seen as a last-ditch effort to raise cash by getting rid of underperforming assets. A divestiture may also occur if a business unit is deemed to be redundant in a merger or acquisition. Indeed, a divestiture can occur if the disposal of a business unit increases the potential sale value of the firm considering a merger or acquisition.
Additionally, a divestiture might take place if a court requires the sale of a business unit in order to address anti-trust issues or improve market fairness.
Market Analysis
In order to decide which assets, properties, or divisions to sell off, senior management must have a clear view of each business unit’s market. They must try to evaluate all potential growth in demand, competitive advantage, alignment to the company’s vision, and potential for long-term value creation from a financial, customer, people, and societal standpoint.
Investing in the Businesses that Remain
In addition to focusing on the assets to sell off, senior management must also consider what would be necessary to keep the company’s remaining assets successful. This can be a challenge if the company’s core competencies are somehow related to the assets about to leave the company. The company still needs to figure out how it will grow and make up for the losses in revenue, even if they were small, from the shedded assets.
Fitting in with the Overall Corporate Strategy
Divestitures usually revolve around underperforming assets. However, even a strong-performing business that does not fit with the corporate strategy might be tying up capital that could be better deployed on higher-impact investments.
As such, companies might do well to sell off high-performing assets. This might seem counter-intuitive, so senior management will need to rally stakeholders behind a decision to carve out or spin off a successful business or product. An example of this would be a fossil-fuel company selling off traditional assets in order to focus on meeting sustainability or net-zero initiatives.
5 Types of Divestitures to Consider in 2024
There is no one-size-fits-all when it comes to divestitures. Below are 5 different divestiture types that companies can consider as they put together their 2023 business strategies.
Liquidating Underperforming Business Assets
This is generally considered the most likely reason for a divestiture: selling off a brand, product line, service, or group of assets that simply doesn’t generate as much revenue as other parts of a business.
This can be particularly difficult for senior leadership or business owners, especially those who have spent significant resources in building or acquiring those assets, only to see them on the auction block. Additionally, while some assets generate revenue, it might not be enough revenue to sustain that asset – i.e., the expenses or liabilities are too great to maintain them.
Selling the Entire Business
The sale of the entire business can be considered a divestiture as well. Oftentimes, the idea to sell might arise when a buyer appears unexpectedly. Additionally, a company might wish to sell itself to another company or group of investors before financials deteriorate any further. “No matter the reason, selling a business can count as a divestiture as you’re divesting your financial interest in the company,” explains Fundera.
Selling a Subsidiary
This is another common divestiture approach. Instead of a company selling itself in its entirety, or selling off assets piecemeal, it decides to instead sell off a subsidiary, division, or brand that can be easily spun out of the organization. Selling a subsidiary business can be potentially lucrative and attractive to buyers and investors especially if the company has particular brand recognition or a strong, loyal customer base, that would serve as a built-in market for the new, spun-out subsidiary.
Closing Locations
Divestitures also include the closing of a business location or group of locations. Companies do this all the time, as unprofitable, company-owned warehouses, plants, offices, or other operating locations are shut down in order to scale back and reduce the company’s physical footprint in order to save money. The numbers can easily guide senior management into making such divestitures, unless unfavorable legal or tax considerations would make divesting these assets costly and unattractive.
Bankruptcy
Companies entering into bankruptcy might find themselves needing to divest their assets in order to satisfy the demands of the court and their creditors. Whereas divesting underperforming assets or closing costly locations might make financial sense, a bankruptcy might force a company to divest itself of assets that actually are performing well, in order to raise much-needed cash.
Ensuring that Information Remains Secure During a Divestiture
Divestitures are expected to increase this year and beyond, as companies slash non-key or underperforming assets, so buyers and sellers will need to leverage technology that can support the transaction every step of the way. Having a trusted virtual data room (VDR) partner is critical to ensuring proper deal due diligence so that the transaction can close successfully and on time.
Caplinked offers a world-class VDR that can ensure that highly-sensitive documents can be shared securely across any platform and any device. Uninterrupted document access is key to eliminating bottlenecks that can occur throughout the document evaluation and deal review process.
Ensuring that those responsible for the review of a particular document can carry out their responsibilities in a timely manner is critical to deal success. Caplinked’s Activity Monitor feature enables workspace administrators can track and compare activity across multiple groups. For example, this allows the sell-side to anticipate which leads may be the most interested in the deal, and the buy-side to track the progress of multiple potential acquisitions at once.
Once a deal moves into the due diligence phase, Caplinked’s VDR ensures that with the strongest security measures in place all parties can be confident that their review of highly sensitive material will not be at risk of misuse or compromise, and that the tools included will help expedite the entire process. Data and documents flow more smoothly, shaving weeks, if not months, off of the entire M&A timeline.
Start your free trial today to see how Caplinked can help streamline all aspects of the dealmaking process.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Sources
Fundera – Divestiture Definion: What is Divestiture in Business?
Investopedia – Divestiture
Deloitte – 2022 Global Divestiture Survey
PwC – Deals Mid-2022 Midyear Outlook
EY – Can divesting what holds you back move your strategy forward?
