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EY has said it expects divestments to be a core component of companies’ capital strategy in the next year as management teams address pressure to improve portfolio performance.
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EY tips increase in divestment
11 March 2015
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8 minute read
The firm’s Global Corporate Divestment Study 2015, Closing the deal: strategies to increase speed and value found more than half of executives surveyed (54 per cent) expect the number of strategic sellers to increase in the next year and that for those willing to divest, buyers are on the hunt. The survey also showed nearly half (42 per cent) of companies expect the number of unsolicited approaches to increase in the next year.
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EY Oceania transaction services leader Stephen Lomas said the survey results, combined with the fact that a lower Australian dollar is expected to increase inbound investor interest, should further motivate boards to fully understand the value of the assets across their business.
“It’s vital that you understand the value of the businesses and assets that make up your company. If a buyer comes knocking, you need to be able to appropriately assess the offer, understand whether the asset fits in your company’s growth plans or if you are better served divesting that asset and reinvesting the capital elsewhere,” said Mr Lomas.
“Disruptive technologies are creating major changes across a range of sectors which may lead to an unprecedented level of portfolio turnover. So we expect to see more companies assessing their core businesses and evaluating their portfolios closely this year.”
Mr Lomas said the need for companies to find growth, both in Australia's low-growth economy and globally, will further fuel M&A and “divestments are a key path to achieving growth”.
The EY survey also showed that 74 per cent of respondents used funds from their most recent divestment for growth. Specifically, 34 per cent reinvested the funds back into the core business; 23 per cent invested in new products, markets, or geographies; and 17 per cent made an acquisition.
“It is particularly interesting to note that the market rewards companies that divest assets that are no longer part of its future growth plans, with two thirds of companies seeing an increased valuation multiple in the remaining business after their last asset sale," Mr Lomas said.
“Boards need absolute clarity on their growth strategy and they need to properly assess whether they need to continue to own parts of their company. They should also be prepared for unexpected approaches by understanding the value of their portfolio," he said.
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