Let it go! Disposals, Greece and old models

Takeways:  Robust M&A markets make this a great time to take a good hard look at corporate portfolios, work out what a business stands for and what it needs to divest. Do all of our assets represent what we’re about? Could these businesses have a better owner? Could we recycle capital and buy something that’s more “us”? The ‘Disney’ version of this blog might build to a crescendo about being “true to yourself” at this point…which is where Greece comes in. It really is decision time – both sides need to let go of intractability to bring a workable compromise. Default looms, which could inspire yet more redrawing of the growth map. The old models no longer hold, hence the pressing need to rethink and let go of old ideas. Or as Elsa might put it: “the past is in the past”…..

Time to divest

Companies clearly benefit from making divestments. Almost three quarters of respondents to our latest Global Corporate Divestment Study said they used the proceeds from a sale to fund growth. When we ask businesses what had triggered a sale, it’s clear that shareholders are keen on divestment too. Almost half of respondents said that shareholder activism was one of their main considerations.

And yet, disposal outcomes can often disappoint. Only 19% of companies we asked performed highly across our three key areas – on post-sale valuation multiples, on price and on timetable. There are many ways that companies can improve their processes, but the root of these poor outcomes can be more fundamental.  Often it’s just about timing – i.e. knowing when to let go.

Ideally, a sale process should start 18 months before the targeted disposal date to give companies the best chance to prepare for sale. Obviously that is very much an ideal – the reality means companies will most often work to a far shorter time frame. But far too often  they will have held onto an asset past its ‘sell-by-date’ and  sell in a rush. Why?  Due to an inadequate portfolio review process, companies may not realise that the business is underperforming against its peers. Boards might hope that a business can be turned around or made to fit within their plans. They might be reluctant to let go of market share, even if a business no longer fits. Or there may be a strong emotional attachment.  This can be more of an issue in consumer products markets, where brands and market share data make letting go more difficult – although there’s really no end to what boards can become attached to.

The upshot is that without regular and effective portfolio reviews – and an analytical approach – companies can end up holding onto businesses with much slower growth than their whole, that don’t represent or fit within their current model, that drain resources and management time and that clearly belong with another owner.  Better timing isn’t the only solution, but helps other elements fall into place, giving companies time to put crucial divestment work streams in place and optimise value.  Time to let go and put that capital to better use.

Time to decide

How “non-core” is Greece looking this week? Very, according to bookmaker William Hill, which was closed its book on whether Greece will leave the Eurozone. Pretty, according to debt markets, who are pricing in more than a 3 in 4 chance of default – a potential step on the road to exit.  Fairly, according to the analyst community, where there is more talk of reconciliation, mainly due to will of the Greek people and what both sides have to loose.

The latter is a rationale response in a debate that is feeling less and less so. We could comfort ourselves with previous fudges, but they created by different cooks, who weren’t so far apart in their recipes for a solvent Greece. Syriza won’t restart an austerity programme it won power by promising to end and Greece’s creditors won’t release funds until it does.  Syriza wants debt restructuring – not that unreasonably, looking at the eye watering numbers. However, this remains a red line for the Troika – and much of the Eurozone. There is always a compromise, but it’s never looked so far away.

With common ground in such short supply and significant maturities coming up in May and June, we need to think in more detail about default. There is more than one kind in this saga. Greece could choose to effectively default to its people by not paying pensions or wages, which would be political suicide. It could officially default to the remaining private-sector bondholders, but that would burn bridges for relatively little gain. It could choose to default to the IMF and the European Central Bank, which would also bring the greatest financial relief, but these are very big bridges to burn. Default doesn’t mean automatic GREXIT. However, the ECB’s next logical step would be refuse Greek securities, thus paralysing the Greek banking system.  Greece would need to act quickly to implement significant capital controls– but obviously even a whiff of default is already sending capital running.

And then? To stay in the euro after default, Greece would still need to reconcile with its partners, probably after an election where the people effectively decide between the Troika way or the drachma highway.  Assuming there is no further compromise from the Troika et al, this is where we are. Greece finally needs to decide where its fate lies.

 Time to rethink the growth map….and risk?

The rapid reshaping of the global growth (and risk) map is one of the primary motivations for companies reshaping their portfolios and rethinking their growth models. This last week has brought more evidence of significant change.  China’s economy grew at its slowest pace in six years in the first quarter, just as the IMF predicts that India’s GDP growth will outperform China’s in 2015-16. India still needs to deliver on reforms, but it would be the first time in 16 years that the tiger has outperformed the dragon.  Along with India, the IMF picks out the US, the UK and Spain to provide momentum in the year ahead.  The IMF has raised its 2015 Spanish growth forecast by 0.5% in the last three months, underlining its revival and the Eurozone’s change in fortunes.

Of course, the Greek crisis cloud lingers still. Limited exposure, monetary support and firmer growth should provide an ample buffer to further escalation. However, these are unusual markets and changing bank capital profiles have deadened some shock absorbers. Markets can seem impermeable to bad news some days, but whipsaw on thin news flow as they did with last October’s US Treasury ‘flash crash’. The global risk map has shifted. Not just in the more obvious ways, in terms of geopolitical uncertainty.  In its latest Global Financial Stability Report, IMF argued that risks have not only risen worldwide, but that they have moved to parts of the financial world that are harder to monitor.

The financial crisis taught us that it’s not necessarily the direct exposure that the biggest problem – it’s what’s lurking in the shadows.  Greece is no Lehman, but it can still cause trouble.


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