Divesting might not be the right strategy to add value.
According to Willis Towers Watson’s Divestment Performance Monitor, in partnership with Cass Business School, 53% of companies buying carved-out portions of other businesses in the first half of 2019 have outperformed their industry benchmarks by an average of 1 percentage point (pp) based on share price performance.
This marginal outperformance is in contrast to companies that divested parts of their business this year, 63% of which went on to significantly underperform their MSCI Index with an average underperformance of –7 pp, said Willis Towers Watson.
While divestitures lose value across the board, the acquisition of a divested asset, as well as spin-offs, has an outperforming effect, the firm added.
The study also shows that the size of divestments had an impact on performance for the divesting company.
Companies divesting 0% to 5% of their total company value underperformed their market by an average of –0.8 pp in the first half of 2019, according to the study.
This rose to –6.9 pp for companies divesting 5% to 15% of their assets by value and –6.3 pp for those divesting over 15%, the study shows.
The longer-term trend for firms divesting parts of their business has been similarly challenging with performance over the past three years at –3.6 pp and over the past decade at –2.8 pp.
The study also shows that the volume of divestments worth more than US$50 million in the first half of this year has declined to its lowest level in the past decade, with 251 transactions taking place in H1 2019 compared with an average half-year total of 314 over the past decade.
Spin-offs were the only deal type to successfully buck the negative trend for firms divesting parts of their business, with a positive performance of +1 pp above the MSCI Index.
“Most companies are set up to buy assets, not sell them, which means decisions to sell are often made at the wrong time or in the wrong manner. Such mistakes are expensive,” said Duncan Smithson, senior director, Mergers and Acquisitions, Willis Towers Watson.
“The superior track record of spin-offs, transactions that are complex and require considerable preparation to address the many moving parts and situations that can go wrong, sets the standard for companies aiming to overcome the odds and sell well,” he explained.
Defining the right deal, managing talent uncertainty and rooting out stranded costs can make the difference between a divestiture that succeeds and one that destroys value,” he advised.
Insights from the data, which look at companies selling portions of a parent company to both listed companies and private equity buyers, include:
All regions underperformed: North American divestitures performed worst of all regions (–5.3 pp) in H1 2019, followed by Europe (–3.2 pp) and Asia-Pacific (–2.0 pp).
Slower deals: Slow deals continue to dominate over quick deals (60% versus 40%), possibly contributing to the negative trend, as delays in execution can suggest the loss of critical talent, internal struggles or stakeholders questioning the deal rationale.
Despite the challenges involved, companies are likely to remain under pressure to proactively manage capital and make divestments to streamline product portfolios, said Smithson, adding that activist investors will also continue to push some companies to divest assets to reinvigorate company growth and unlock shareholder value.
“Selling a business is rarely a one-off activity,” said Smithson. “Our research shows companies that actively manage their divestiture portfolios in a selective and disciplined manner outperform competitors that sit on the sidelines. With time and practice, these companies create an institutional capacity to take advantage of divestiture opportunities at the right time, in the right way, to create the most value for their shareholders.”