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Buying divested assets creates shareholder value in 2019

Willis Towers Watson’s Divestment Performance Monitor

Mergers and Acquisitions|Financial, Executive and Professional Risks (FINEX)
Mergers and Acquisitions

By Jana Mercereau and Duncan Smithson | September 26, 2019

In 2019, firms divesting part of their business continue to struggle to add value. However, those buying the assets do better.

Buying divested assets stands out as the only M&A strategy to create shareholder value in 2019, as firms divesting part of their business continue to struggle to add value, significantly underperforming the Global Index1 by an average of -7 percentage points. However, those buying the assets do better.

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 School2 .

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.

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 companies divesting 5-15% of their assets by value and -6.3pp for those divesting over 15%. those divesting over 15%.

“The size of divestments had an impact on performance for the divesting company"

Divesting firms face challenges

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.

Spins offs have bucked the trend

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.

The green line below (16.3pp) shows the media-adjusted performance of all spin-offs throughout the period.
The blue line below (1.4pp) shows the median-adjusted performance of all spin-offs over a three year rolling period.
The yellow line below (6.6pp) shows the median-adjusted performance of all spin-offs over one-year rolling period.

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.

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.

Data 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: 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. 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. Willis Towers Watson 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.

Further information

For further information about the research, or for help with your M&A activity, please contact your Willis Towers Watson consultant, or:

To access more detailed data in this analysis, please download our full report


1The MSCI World Index is used as default, unless stated otherwise and median performance used throughout.
2The 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


Duncan Smithson
Senior Director – Mergers and Acquisitions

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