Divesting in turbulent times requires a fresh approach in order to secure value

Unprecedented economic volatility means that the ‘accepted rules’ of divestment no longer apply, according to a new Ernst & Young report “Divesting in turbulent times: Achieving value in a buyer’s market”. The current crisis demands that companies now think more creatively, are flexible, prepare more carefully and act more decisively to ensure that their deals are successful – all within a contracted timeframe over which they have little control.

The above survey is the first of its kind conducted globally, among 360 c-suite level executives at companies across the world, with an annual turnover of $1bn+.

The survey revealed that more than half of deal makers (53%) are more likely to consider divestments due to the adverse economic events. Respondents expect deals to be more sophisticated in process and structure, together with increasingly complex demands. While the survey finds a sizeable minority (23%) looking for cash in order to bolster the balance sheet, fund acquisitions or pay down debt, almost half (48%) are more likely to consider a range of innovative structures at a time when divesting businesses for cash may be difficult to achieve.

Garen Walkerley, Director of Ernst & Young’s Transaction Advisory Services, says, “Prior to the credit crunch, 100% sales for cash at closing were not uncommon but this is no longer the case. While a higher percentage of companies are forced to consider divestments, frozen debt markets give them little option but to welcome alternatives to cash sales and more innovative deal structures."

“Sellers too, are finding that they need to pursue multiple divestment options, often simultaneously, in order to have the greatest chance of achieving their objectives. Overall, corporates will need to increasingly deploy portfolio management techniques long practised by private equity to secure the most value.”

Players on the buy side
We are firmly in a buyers’ market and the range of buyers has expanded to include companies in emerging markets, sovereign wealth funds and governments. Often their needs are more varied, which further adds to the complex demands that sellers need to deal with.

“Cash rich buyers have a rare opportunity to acquire businesses that would not normally be for sale at current valuations,” continues Walkerley. “Companies with strong balance sheets are likely to strike attractive deals. For these deals to succeed, both buyers and sellers will have to work much more closely together to close transactions. As buyers have the upper hand, sellers must focus on the different requirements of these buyers in order to convince sceptical investors about the merits of a deal, and therefore customising the ‘for sale’ offering specifically to suit each prospective bidder.”

Preparation drives value
Only about one-third of companies surveyed (36%) believed that their recent divestments had met expectations. 62% cited ‘lack of time’ to prepare for divestments as the biggest obstacle to successful divestment. Historically, almost two-thirds considered that at least six months was necessary to successfully execute a deal – a timeframe that might not always be available in today’s economic climate. Extraordinary times call for extraordinary measures and some companies may have little option but to sell quickly and possibly at reduced valuations.

“Taking time to prepare a business for sale has become more important than ever, despite the fact that the current economic environment is forcing many companies to undertake accelerated divestment. As such, companies should maintain a heightened state of readiness across their portfolios and be prepared to exit all or part of their business at very short notice” says Walkerley. “Whether you are a buyer or a seller, proactive portfolio management based on comprehensive information will give added flexibility. Divestments will not yield the value they once did, but the best defense against that shift is thorough preparation.”

Other key findings of the survey
· In financial services, 61% of respondents reported that current market conditions made them more likely to consider divestments and 55% report they are more likely to consider multiple divestment options in today’s environment – both more than the survey average. With transaction sizes for financial services companies often extremely large, cash deals are especially difficult to finance.
· 23% of respondents anticipate emerging market buyers will be their main acquirers of assets in the next two years, against just 11% saying they were their main acquirers in the past two.
· While only 2% of respondents said sovereign wealth funds had been their main buyers in the past two years, 7% expect them to be in the next two. By contrast, 12% expect private equity to be their buyers in the next two years, compared to 16% as buyers two years ago.