Divestments are top of mind in corporate strategies as companies look to extract maximum value from strategic sales, find’s EY’s annual Corporate Divestment Study, which surveys corporate and private equity executives.
This is even more top of mind for Canadian companies than their global peers, as 56% of Canadian companies are planning to divest within the next two years, versus 49% globally.
Divestments “are increasingly being used to fund new opportunities, to stay ahead of changes in consumer preferences and to drive innovation,” says Doug Jenkinson, Partner in EY’s Transaction Advisory Services. “In 2016, companies are making astute reallocation of capital and a disciplined review of portfolio assets a priority.”
The survey, Learning from private equity: experts at extracting hidden value, finds only 3% of companies don’t expect to make any divestments in the next two years, and 41% say while they are not actively pursuing a divestment they are open to opportunities.
With the low value of the Canadian dollar compared to the American dollar, Canadian companies are “on sale” for foreign buyers, notes EY. This may be an advantage for companies looking to redeploy capital into their core businesses. However, the financial results post-closing of Canadian operations will not look as strong for a foreign buyer, given the translation from Canadian to U.S. dollars; therefore Canadian companies will need to be thoughtful as to how they tell their story, says Jenkinson.
Among companies that completed a divestment last year, 37% re-invested the divestment proceeds back into the core business, 24% invested in new products, markets or geographies and 6% made an acquisition.
What to expect in major sectors
Financial services: 56% of financial services companies surveyed expect to divest within the next two years, including 43% within the next year. In addition, 51% expect the most likely buyer of their next divestment to be a foreign emerging market financial institution seeking global expansion, compared to 27% last year. Fifty-one percent have not leveraged their required investments in regulatory programs to assist in a divestiture.
Consumer products/retail: The study highlights the growing importance of analytics to help predict consumer preference. However, 87% of consumer products and retail respondents say that poor-quality data makes it difficult to use analytics effectively in decision-making. Notably, 64% plan to invest in greater social media analytics capabilities over the next two years, compared with just 19% across all sectors. Forty-seven percent say they often scarified value because of lack of focus on non-core businesses.
Technology: Activists continue to be on the prowl, with technology companies making up 33% of activist targets in North America last year. Yet, 39% of technology companies say they are only moderately prepared for activist threats, and 17% are not prepared at all. Further, 60% say valuation considerations were the most important factor in motivating them to consider a divestment. More than half say intellectual property issues are among the top challenges to divestment in the sector.
Life sciences: 51% of life sciences companies, and 56% of pharma companies plan to divest within the next two years. Our study found that one-third of life sciences companies plan to divest largely because they lack capital to build opportunities, and 58% say they held onto assets too long when they should have divested.