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Divestment activity poised for rebound in the second half of 2020

Willis Towers Watson’s Divestment Performance Monitor (DPM)

Mergers and Acquisitions
Mergers and Acquisitions

By Jana Mercereau and Duncan Smithson | September 25, 2020

Following a fall in performance in the first half of 2020, companies look to recalibrate their strategies to recover in a post-crisis world.

The value of divestment deals plunged to record lows in the first six months of 2020, according to Willis Towers Watson’s Divestment Performance Monitor (DPM), in partnership with the Business School (formerly Cass). As the COVID-19 pandemic changed the game, with corporations confronted by a sudden and dramatic shift in their markets, 63% that sold portions of their business in the first half of 2020 underperformed.

Companies engaged in divestment deals in the first half of 2020 underperformed by 11.3pp on average.

Companies actively engaged in divestment deals in the first half of 2020 underperformed the Global Index1 by an average of 11.3 percentage points (pp). This is an even sharper decline compared to negative performances in H1 2019 (-7.0 pp) and H2 2019 (-5.9 pp), and is the worst six-month period since the divestments database launched in 2010.

Divestiture volumes hold up well

While the negative performance is significant, it is not unexpected considering the severity and volatility of the markets in the first half of 2020. Given the defensive role that divestitures can play in distressed circumstances, the absence of a bigger spike in deal volume is perhaps more surprising. With 292 deals completed in the first half of 2020, volumes have been driven by an upsurge in deals in Europe and North America, yet overall numbers are down globally compared to the previous six months (315).

Private Equity (PE) buyer activity fails to materialise

Another unforeseen outcome was the much-anticipated surge in PE buyer activity which has so far failed to materialise, despite that industry holding record levels of capital. Instead, PE buyers accounted for just 22% of all divestments in H1 2020, a market share on par with the same period last year.

COVID-19 has sent the M&A business into a deep freeze after a decade-long boom.

COVID-19 has sent the M&A business into a deep freeze after a decade-long boom and volumes in the third quarter will most likely remain stuck in low gear, being tied to deal activity occurring just after the full impact of the pandemic struck.

Companies face unprecedented challenges as a result of the crisis’ financial impact, forcing many into survival mode. Depending on the severity of the fallout from COVID-19, divesting non-core assets will be key to preserving and enhancing value for many companies, as they reshape their portfolios to recover and thrive in a post-crisis world.

Key insights

Insights from the DPM data, which looks at companies selling portions of a parent company to both listed companies and private equity buyers, include:

  • All regions but Europe underperformed: North America divestitures performed worst of all regions (-23.5 pp) in H1 2020, followed by Asia Pacific (-17.1 pp). In contrast, European divestitures managed to outperform their industry benchmark by an average of +4.7 pp, boosted by a positive performance of +4.9 pp from UK deals, which account for roughly one quarter of all European divestitures.
  • Mega deal activity on par with 2019: Six deals closed in H1 2020 compared to five deals in H2 2019. The performance of mega deals dipped sharply, currently at -22.4 pp compared to +6.1 pp for the last six months of 2019.
  • Buyers unable to buck downward trend: Buying divested assets was the only M&A strategy in 2019 to create shareholder value. Acquirers (-15.7 pp) are now performing worse than sellers (-11.3 pp), suggesting that both parties would have been better off sitting out the market turbulence in the first half of 2020.
  • Selling to PE buyers: The trend for seller performance to be worse when dealing with PE buyers (-14.6 pp) compared with corporate buyers (-9.5 pp) continued in H1 2020. PE acquirers tend to have professional transaction teams with deeper experience and more regular deal flow, enabling them to negotiate harder. In order to optimise value and ensure that buyers do not win at their expense, sellers will benefit from thorough planning and preparation for sale.

Although the data shows that just over six out of ten deals (63%) from H1 2020 underperformed, this also means that the remaining deals were successful in outperforming rival companies that did not divest.

We do not know exactly what lies beyond the COVID-19 crisis, but current trends driving divestment activity now may accelerate, and many organisations will soon find themselves without the luxury of choice. There is clear evidence that down-cycles can present unique opportunities and sell-side M&A can be an effective tool as companies enter the recovery stage of COVID-19. The most resilient and successful companies will be those which are able to quickly re-identify non-core assets, which are prepared to execute at the right time, which show discipline and which focus on portfolio transformation.

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 is 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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