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Press Release

Buying divested assets only M&A strategy to create shareholder value in 2019

Investments
Mergers and Acquisitions

August 21, 2019

Firms divesting part of their business struggle to add value, underperforming by -7 percentage points. However, those buying the assets do better

LONDON, Wednesday 21 August 2019 — Based on share price performance, 53% of companies buying carved-out portions of another business in the first half of 2019 have outperformed their industry benchmarks, by an average of 1 percentage point (pp), according to Willis Towers Watson’s Divestment Performance Monitor (DPM), in partnership with Cass Business School1.

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 -7pp. While divestitures lose value across the board, the acquisition of a divested asset, as well as spin-offs, have an outperforming effect.

The study also shows that the size of divestments had an impact on performance for the divesting company. Companies divesting 0-5% of their total company value underperformed their market by an average of -0.8pp in the first half of 2019. This rose to -6.9pp for companies divesting 5-15% of their assets by value and -6.3pp for those divesting over 15%.

The longer-term trend for firms divesting parts of their business has been similarly challenging with performance over the last three years at -3.6pp and over the past decade at -2.8pp. The study also shows that the volume of divestments worth over $50m in the first half of this year has declined to its lowest level in the last decade, with 251 transactions taking place in H1 2019 compared to an average half year total over the past decade of 314.

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 +1pp above the Index.

Jana Mercereau, Head of Corporate Mergers and Acquisitions for Great Britain, said: “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.

“The superior track record of spin offs, a transaction that is complex and requiring 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. 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.”

Insights from the data, which looks 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 (-5.3pp) in H1 2019, followed by Europe (-3.2pp) and Asia-Pacific (-2.0pp).
  • More slower deals: Slow deals continue to dominate over quick deals (60% vs 40%), possibly contributing to the negative trend as delays in execution can suggest 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.”

Jana Mercereau
Head of Corporate Mergers and Acquisitions for Great Britain

Mercereau said: “Despite the challenges involved, companies are likely to remain under pressure to proactively manage capital and make divestments to streamline product portfolios. 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. Our research shows that 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 spot and take advantage of divestiture opportunities at the right time and in the right way to create the most value for their shareholders.”

Willis Towers Watson Methodology

  • All analysis is conducted from the perspective of public sellers.
  • Share price performance within the semi-annual study is measured as a percentage change in share price from six months prior to the announcement date to the end of the half year of completion.
  • Only completed divestitures with a value of at least $50 million which meet the study criteria are included in this research.
  • All private equity sellers are excluded in the sample.
  • Deal data sourced from Refinitiv.

About Willis Towers Watson M&A

Willis Towers Watson’s M&A practice combines our expertise in risk and human capital to offer a full range of M&A services and solutions covering all stages of the M&A process. We have particular expertise in the areas of planning, due diligence, risk transfer and post transaction integration, areas that define the success of any transaction.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving in more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.

Footnotes

1 The global database analyses the share price performance of companies selling assets, from six months prior to the divestment announcement to up to six months after the divestment has completed.

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