The Growing Appetite for Divestitures

Divest To Grow

Divestitures are a key strategic lever for companies navigating market volatility and economic uncertainty. According to Baker Tilly, 63% of all surveyed dealmakers expect divestitures to have a major impact on driving M&A activity in the US market in the short term. The growth in divestitures will inevitably open new doors for companies, as markets become more competitive. On the other hand, the length of time divestments take will rise as well, due to the added amount of due diligence involved.

A divestment allows a company to sell off a subsidiary portion of its business to secure capital for its core business. That capital is then used to obtain new technology, increase efficiency, or enter a new market or geographic region altogether.

Executives and investors have learned that to increase value and grow core business, they must keep up with the times. This means tracking things like changing consumer habits, new technology, new capabilities, and increased pressure from activists and ESG (Environment, Social, and Governance) investors.

Companies Turn To Divestitures in Record Numbers

Divestitures are a reliable route to growth for companies seeking maximum value from strategic sales.

Some key findings from Deloitte’s 2024 Global Corporate Divestiture Survey:

• 4 out of 5 respondents engaged in three or more divestitures in the 36 months before 2024.
• 98% of all respondents had abandoned a divestiture in the prior 12-18 months.
• 80% of respondents expect three or more divestitures in the next year and a half.
• There is increased readiness to complete divestitures faster than expected, partly as a result of current market volatility. Respondents also showed transaction optimism, despite a challenging market reality.

The M&A market saw signs of recovery in 2024, after a poor 2023. This rebound has been tempered by policy uncertainty and fiscal challenges in 2025.

Benefits of Divestitures

One of the most important benefits of divestments is streamlined operations. A company can refocus resources and capital toward its core business by recognizing that an underperforming asset would be better managed by a new owner instead of trying to save the failing subsidiary asset.

According to Deloitte, 39% of US respondents see refocusing on the core business as their motivation for future divestitures. This speaks to a broader market trend of companies focusing on the core business and shifting away from diversification, a trend that will only grow as a result of rapid technological and economic change.

Divesting in the Current Geopolitical Climate

The economic landscape is changing, but companies are not as frightened by geopolitical shifts now as they were years ago. The 2024 Deloitte survey found that nearly half of C-suite respondents indicated their organizations were considering four or more divestitures over the next 12 to 18 months, reflecting a bullish position towards divestment.  More recently, the Global EY-Parthenon CEO Outlook Survey found that 57% of business leaders were committed to pursuing M&As over the next 12 months. Reviewing the company’s portfolio regularly remains important, even in times of economic uncertainty.

Despite their emboldening position, companies are still concerned about the impact of tax policy, increasing prices of raw materials and operational costs, and tariffs. 71% of CEOs have also flagged the growing valuation gaps between buyers and sellers as a concern that will slow M&A activity. These factors could all delay or hurt the sale of a particular unit.

Divestitures and Private Equity

Private equity buyers can add significant value to a divestiture. There are two reasons:

1. PE buyers have statistically paid more for a business than corporate buyers due to competition.
2. 49% of companies reported that selling to a PE buyer led to a faster closing.

There are some challenges to divestments involving private equity. For example, companies may have to spend more time on lender diligence requests or may have trouble developing an accurate, stand-alone financial model.

Companies should focus on how to appeal to buyers and keep the sale process competitive. By creating a strong value narrative for investors, the divestment process can be faster and more fruitful.

Companies that sell assets tend to underperform those that buy divested assets. As such, it’s important for companies to prepare thoroughly for divestments to avoid poor timing or disorganized execution.

Shareholder Activism Continues To Prompt Divestitures

A positive momentum surrounding divestments as of late has been activist pressure.

Harvard, Georgetown, and other major investors are being pressured by students and consumers to divest from fossil fuels and other controversial enterprises. Climate change has also become a megatrend in today’s world. ESG investments are on the rise, putting further pressure on companies to refocus their businesses on more ethical products and practices.

These pressures have seen companies place a growing emphasis on sustainability and ESG in their divestiture decisions. According to Baker Tilly, about 45% of dealmaker respondents cited ESG factors as motivators behind recent asset sales. This societal shift is already beginning to reshape various sectors, such as energy, technology, and consumer goods.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Selling A Business-101: A Step-By-Step Guide / Keys to a Successful Sales Process
2. The Nuts & Bolts of a 363 Motion
3. Valuation

This is an updated version of an article published on January 28, 2016 and updated on January 17, 2024.]

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