EY: World leaders recognize challenges in realizing divestiture benefits | Stockwatch
- 79% say they fell short of pricing expectations in their most recent divestiture
- 78% say they have held assets for too long, a historic record
- 76% expect the continued effects of the pandemic to accelerate divestment plans
Despite an expected rebound in corporate divestment activity, world leaders admit that realizing the benefits of the divestments they pursue has been difficult, according to the EY 2021 Global Business Divest Study.
Almost 8 in 10 respondents (79%) say they did not meet pricing expectations during their most recent divestiture. At the same time, more than three-quarters (77%) of respondents say that shortcomings in portfolio or strategy reviews have not led to the expected divestment results. Additionally, 56% of respondents say their most recent divestiture did not generate the multiple valuation impact for RemainCo that they anticipated.
The annual survey of more than 1,000 global executives shows that more companies than ever (78%) in the study’s nine-year history are latching onto companies that were once essential to a business. portfolio, are now an unnecessary drain on resources and the use of capital that could be better deployed elsewhere.
Despite these challenges, as companies face more difficult capital allocation decisions in a disrupted business environment, a majority of respondents (76%) expect the continued effects of the COVID-19 pandemic to continue. are ramping up divestment plans, with 56% planning to initiate their next divestment in two years, taking advantage of the opportunities offered by a robust M&A market.
ESG, technology and returns to stimulate divestment activity
Environmental, social and governance (ESG) factors play an increasingly important role in divestment activities. Almost half (46%) of sellers say ESG issues directly influence their disposal plans, with ESG being a much more important factor in Asia-Pacific (84%) than in EMEA (47%) and America (14%). These results align with mergers and acquisitions data for the first quarter of 2021, which shows that the values of transactions related to ESG and renewables in the first quarter alone are three times higher than for all of 2020. regulatory changes that require companies to reduce their carbon footprint could be further considered in divestment decisions in Europe, while companies in the Americas could reflect on the impact on workforce management and diversity , when a business is split or split.
The EY survey also found that almost all of the companies surveyed (94%) confirm that changes in the tech landscape directly influence divestment plans, up from 59% before the COVID-19 pandemic. Two-thirds (66%) say their most recent divestiture was triggered by suboptimal returns in the divested business. The funds raised by the divestment were devoted to technologies supporting basic capacities (79%) and to new markets, products or geographical areas which better position RemainCo (65%).
Align disposals with strategic imperatives essential to long-term value creation
Increasingly, CEOs need to determine which companies are no longer contributing to corporate strategy by taking a big picture of how it generates long-term value for stakeholders, but 59% of CEOs recognize that they should provide better guidance as to core activities or not. -core and almost half (44%) of respondents say they have difficulty explaining the reasoning of the divestitures to the board of directors and key stakeholders. At the same time, only 37% see alignment with the company’s vision or mission as a factor in identifying disposals.
Commenting on the results, Stelios Demetriou, Partner and Head of Strategy and Transaction Services at EY Cyprus, said: “The pandemic has heightened the importance of long-term value creation as a key element in the strategy of EY Cyprus. ‘business. In this context, divestment decisions must serve the strategy of the company, enable its transformation and create long-term value, rather than serving only short-term financial objectives. In addition, the proceeds from divestitures must be invested in technology or capabilities that enhance the company’s competitive advantage. These considerations should be explained to employees, customers and investors so that they understand and share the company’s strategy.