Financial Poise
A path diverging in a wood, representing an opportunity for divestment and ESG investors

The Expected Appetite for Divestments

Divest to Grow

The percentage of companies utilizing divestments doubled from 2017 to 2019 but slowed to record lows from 2020 to 2022. The need to divest non-core assets will continue to cause organizational divestiture plans to grow well into 2024. On the other hand, the length of time divestments take will rise as well due to the added amount of due diligence involved.

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.

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.

Companies To Turn To Divestment in Record Numbers

Divestment was a reliable route to growth for many corporate leaders as companies sought to earn maximum value from strategic sales.

Some key findings of EY’s 2019 annual survey of corporate and private equity executives:

  • 84% of global companies planned to divest by 2021 (up from 49% in 2017).
  • 60% of corporations used divestments to fund growth and invest in new products, markets, and geographies.
  • The top reasons for divestment were an asset’s weak competitive position in the market (69%) and streamlining a company’s operating model (67%).
  • Challenges in divestments include geopolitical shifts, tax exposure, and lack of a company’s flexibility in the sale structure.

Globally, in 2023, mergers and acquisitions (M&As) fell to an all-time low due to record high interest rates and consumer companies’ confidence being terminally low. M&A volume fell 18% (approximately $3 trillion), which is the lowest volume since 2013.

Benefits of Divestments

The most important benefit of divestments is streamlined operations. A company can refocus resources and capital toward 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.

In pursuing growth, technology has also become a large factor in the need to divest. The study cites companies like GE, whose divestitures allowed the company to focus more on renewable energy, power, and aviation. IBM’s divestitures allowed the company to acquire Red Hat, which gave IBM new capabilities in software and technology. EY found that 80% of companies expected technology-driven divestments to increase into 2020.

Along with new investments in technology, companies that have made a recent divestment have also cited the following use of funds:

  • Debt payments
  • Acquisitions
  • Payments to shareholders

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. Only 51% of companies in 2019 said that economic shifts would influence their divestment decisions into 2020, as opposed to 62% in 2018. Reviewing the company’s portfolio regularly is important, even in times of economic uncertainty.

Despite growing courage, companies are still concerned about the impact of tax policy, increasing prices of raw materials and operational costs, and tariffs. These factors could all delay or hurt the sale of a particular unit.

Divestments and Private Equity

Based on EY’s research, it’s evident that 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.

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

Shareholder Activism and Economy Continue to Prompt Divestments

The greatest news surrounding divestments as of late has been activist pressure and the economy climbing upward. Harvard, Georgetown, and other major investors are being pressured by students and consumers to divest from fossil fuels and other controversial enterprises.

Climate change, for example, has 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. Companies in specific sectors (such as energy) will feel the effects of this societal shift the most.

We think you’ll also like:

  1. Crash Course: Private Equity Funds, Sponsors, and Investors
  2. What is a Family Office?
  3. Business Transition and Exit Planning: Welcome to the Jungle!

[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. Roadmap to Selling a Business or Taking on Outside Investors
  2. Ethical Issues in Real Estate-Based Bankruptcies 
  3. MBA Boot Camp

This is an updated version of an article originally published on January 28, 2016, and updated again on March 9, 2020.]

©2024. DailyDAC™, LLC d/b/a/ Financial Poise™. This article is subject to the disclaimers found here.

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About Michele Schechter

Michele has been a director with Financial Poise since 2012. Share this page:

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