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This week’s blog comes from Charles Honnywill, Transactions Partner and Divestiture Leader at EY
It sounds counter-intuitive doesn’t it: selling assets to help your company grow? But, our data shows more UK companies are doing just that. Since last year, the proportion of UK businesses planning disposals has more than doubled and one of their key motivations is the need to invest and adapt.
In this week’s blog I want to share my views on how technology in particular is driving divestments and – crucially – how companies can achieve the best value from their disposals. Because, what the Study also highlights is how many companies are leaving it too late and leaving value on the table.
The most striking part of EY’s 2018 Global Divestment Survey is the proportion of companies planning to sell assets in the next two years – 87% globally and 97% in the UK. In both cases this is more than double the previous figure.
Why are so many UK companies looking to sell? One of the more obvious things to note is that we’re still in a ‘capital nirvana’ in terms of divestment opportunity. There is plenty of capital seeking a home – not least from private equity. But, this was pretty much the case last year – so what what’s driving so many more UK companies to sell in 2018?
Technology as driver…
My recent experience – and our survey results – are pretty unequivocal on this point. Three-quarters of UK respondents said their divestments were directly influenced by the evolving technological landscape – a big increase from 55% in 2017. Companies understand that they need to make the best use of their capital. That could be selling non-core assets in order to buy or build capabilities. It could also include the sale of an asset where they don’t have the expertise, capital or scale to take it to the next level.
88% of UK respondents say the decision to divest was driven a business unit’s weak market position – up from 65% in 2017
Moreover, this increase in asset sales isn’t just being driven by changes to the external technological landscape. The sale process itself has also changed beyond recognition in the last three years, with the most fundamental change coming in the way we use analytics to understand an asset’s value and present a personalised view to the buyer.
Indeed, data analytics enables sellers to effectively enhance pre-sale value, for example by identifying opportunities to grow revenue, improving operations to deliver better margins, or outsourcing the workforce. This has allowed executives feel more comfortable to act on a divestment, even if the business has been an under-performer within its sector. In addition, we’re able to present synergy cases for each buyer, providing different scenarios for private equity and corporate acquirers. Beauty is very often in the eye of the beholder.
Within the next two years, UK companies will be using much more sophisticated analytics in their deals
In fact, one of the biggest dangers we face is complacency. We tend to over-estimate the pace of change in the short-term and under-estimate in the medium to long-term. This counts for the impact on business models and the M&A process, where we’ve yet to see the full potential of Artificial Intelligence (AI). AI has the potential to do so much more, including the ability to analyse the impact of multiple variables and to ‘learn’ how these variables interact.
Therefore, if companies are planning to sell businesses in a few years’ time, watch-out! The market your business operates in and the process of sale will look very different.
How much is that asset in the window?
But, although there is a clear acknowledgment here of the need to recycle capital, too many companies are unprepared when it comes to disposals. One of the biggest issues is having enough people with the right expertise to carry out detailed enough reviews with enough frequency. Companies can be understandably nervous about bringing in outsiders. On the other hand, more than half (63%) of UK executives admit they held these assets longer than they should have.
At the very least, I’d say that a board should know about every business – or at least every business that is a potential disposal candidate. Better still, they should be on a permanent disposal footing because there is so much value in being prepared. Of UK companies’ most recent major divestments, 69% were prompted by an opportunistic, unsolicited bid – up dramatically from 31% in 2017. Unprepared sellers can find themselves at a critical disadvantage when weighing opportunistic offers. Does your businesses know the value of each and every asset – to you and to the purchaser – if buyers come knocking?
63% of UK companies struggle to identify a team with the right analytics and technical skills to drive portfolio reviews
Sellers’ remorse can take other forms, with 39% of businesses in our survey also expressing regret that they hadn’t created a standalone entity before the sale. I think the best way to know if you have a defined perimeter is to think about cash – i.e. how it goes in and how it comes out as profit. Also think about how the business consumes services like IT and HR. How easy would it be to put a transition services agreement in place? A proactive mind-set can be the ‘make-or-break’ difference in achieving the sale price you want – and nobody feels good about leaving money on the table. Finding out about assets too late or poor presentation will make it hard to achieve an effective and ultimately profitable sales process.
To come in 2018…
There are other reasons to be on our toes in 2018. Our survey shows that 73% of UK and 80% of global companies say that tax policy changes are a geopolitical driver in their plans to divest, whilst 81% of UK companies and 74% of European respondents also named Brexit as driving their disposal decisions. I think US tax reform in particular– as featured here – will drive real changes in deal appetite and execution, with released US cash causing a huge ripple effect across the market. Tax really will be a central component and driver for many deals – not least because the US isn’t the region where taxes are changing. There are also a number of EU initiatives in the pipeline and new tariff considerations.
Yet another reason to think again about how we model deals. As my colleagues have said here before, it all adds up to an active 2018.