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Companies divesting assets in 2019 post second worst performance on record

Willis Towers Watson’s Divestment Performance Monitor (DPM)

Mergers and Acquisitions
Mergers and Acquisitions

By Jana Mercereau and Duncan Smithson | April 14, 2020

New research shows that most organisations that divested a part of their business in 2019 lost shareholder value.

In 2019, six out of 10 organisations that divested a part of their business lost shareholder value, according to Willis Towers Watson’s Divestment Performance Monitor (DPM), which is conducted in partnership with Cass Business School1.

Based on share price performance, companies actively engaged in divestment deals in 2019 underperformed the Global Index by an average of -6.3pp (percentage points).

This is the second worst year since the database was launched in 2010 and only fractionally better than 2018, the worst year on record with an underperformance of -6.5pp. The latest data show that the performance of divestitures in the second half of 2019 was negative, with a performance of -6.1pp lower than the index. Although this is an improvement compared to the first six months of last year (-7.1pp), divestments have now on average failed to add value for six consecutive years.

bar chart shows performance of divestitures from 2010 on a semi-annual basis
Figure 1. Semi-Annual Analysis — All Divestitures

The study also shows that acquirers of divested assets, which managed to outperform their industry benchmarks by an average of +1pp in the first six months of 2019, found the second half of the year much more challenging, and underperformed by -12.7pp.

Deal volume in the second half of 2019 (320) was high compared to the first six months of the year (251). This is consistent with every second half period since 2010 and last year was due to a significant upsurge in deals in both Europe and Asia Pacific. Despite this increased activity, the total number of deals completed in 2019 (571) is a record low since 2010.

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bar chart shows annual volume of divestitures from 2010
Figure 2. M&A Yearly Analysis Volume — All Divestiture Deals

During the past 10 years, in the wake of the financial crisis, our analysis has showed that divesting assets has been challenging for many companies in terms of their share price performance. However, even in the most difficult years, over 40% of companies have still managed to add shareholder value following a divestment.

These companies have understood the time, complexity and cost involved — from implementing thorough due diligence to navigating often overlooked people issues — that allow sellers to approach a deal from a position of strength and command the highest price for the asset.

Key insights

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: Asia Pacific divestitures performed worst of all regions (-8.2pp) in H2 2019, followed by North America (-3.3pp) and Europe (-1.2pp).
  • Upward trends emerging: Over the past 18 months, divestment performance in Europe and North America has improved each half-year, from -5.2pp to -1.2pp across the period in Europe and from -6.6pp to -3.3pp in North America.
  • Unusual number of small deals: H2 2019 saw an unusually high proportion of deals worth less than 5% of the divesting company. Almost two-thirds (64%) of the deals taking place were this size, compared to 40-45% of deals typically in previous periods.
  • U.K. divestitures buck global trend: The positive U.K. performance during the last 12 months (+4.0pp) reflects a longer-term trend that has been sustained for the last three years (+1.1pp).
  • Spin-offs almost disappear: In H2 2019, the number of spin-offs taking place almost disappeared completely, to just 11. This is less than half the number typically seen per half-year, over the past decade.

Despite the dip in deal volume, the uncertainty of tariffs, geopolitical concerns and shareholder pressure, companies will continue to divest, driven by the need to streamline their operating models in order to pursue new growth opportunities. While highlighting the scale of the challenge companies face in order to divest well in such difficult conditions, the data also point to where sellers are successfully bucking the negative global trend.

A disciplined and rigorous approach to the complex separation process will help to attract better buyers, position the remaining business for future growth and drive shareholder value.

Willis Towers Watson DPM 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.

Footnote

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.

Authors

Head of Human Capital M&A, Great Britain

Senior Director – Mergers and Acquisitions

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