EY survey reveals that companies often hold onto businesses that are no longer critical parts of the portfolio and are not performing
A strong wave of mergers and acquisitions is set to facilitate an increase in large firms divesting under-performing businesses.
According to a global poll of executives by EY, divestment activity will be accelerated due to the pandemic; 76% of respondents expect that to be the case while 56% said they plan to make their next divestment within the next two years.
For investors, selling off businesses that are not performing well makes sense, especially as 78% of executives admit to holding onto businesses that were once critical to their portfolio but are now a drain on resources.
While being able to utilize capital in more positive ways after divestment, 8 in 10 executives said that their most recent divestment failed to meet price expectations with shortcomings in portfolio or strategic reviews have resulted in failure to achieve intended divestment results.
"Too often, divestment decisions are based on short-term financial factors, which often result in poor deal performance,” said Rich Mills, EY Global and Americas Sell and Separate Leader. “In truth, divestments should be closely aligned with the overall corporate strategy and seen as an opportunity for even greater transformation.”
Mills added that issues such as investing the funds following a divestment in technology or additional capabilities to give the remaining business a competitive advantage, or the impact of a divestment on the future operating model of the business should be central to the decision-making process.
“Understanding a divestment's role in strategy is critical to capturing new growth and increasing stakeholder value and our survey shows respondents now better understand the importance for executives to create a stronger link between the two,” he said.
Tech and ESG
Technology is playing a bigger role in divestment decisions than before the pandemic: 94% said so compared to 59% pre-pandemic.
ESG is also a key factor with 46% of executives citing this as a direct influence on divestment plans. However, this is less of a factor in the Americas (14%) than in Asia-Pacific (84%) and EMEA (47%).
Andrea Guerzoni, EY Global Vice Chair – Strategy and Transactions, said that companies should consider the long-term benefits for stakeholders when deciding on divestments.
"Triggering events like the pandemic are firmly positioning long-term value creation at the core of corporate strategy. CEOs can rally employees, customers and investors behind divestments by demonstrating the link between the portfolio change and how it supports the company's strategy and broader considerations such as ESG, an increasing deal driver,” he said. “Stakeholders may rally behind a divestment decision that demonstrably aligns with wider responsibilities and requirements while also freeing up capital to invest in such areas as technology that can help increase operational efficiencies, improve the customer experience and streamline decision-making."