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Majority of companies lose value from divestitures, research shows

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Insurer Solutions

February 26, 2019

Over half of companies engaging in divestments since 2010 have lost shareholder value
  • Over 5,500 divestment deals, each worth over $50 million in value, completed worldwide from 2010 to 2018, with a combined value of $3.9 trillion. 
  • Fifty-four percent of these deals underperformed market indices as measured by the study, the remaining 46% outperformed.
  • Based on share price performance, companies engaged in divestment deals underperformed the Global Index1 by an average of –2.1 percentage points (pp).
  • Poor seller performance in the divestment market is in marked contrast to buyers, who saw deals outperform the market by 3.1pp. 2

 

ARLINGTON, VA, February 26, 2019 — Over half of companies engaging in divestments since 2010 have lost shareholder value, according to leading global advisory, broking and solutions company, Willis Towers Watson’s (NASDAQ: WLTW) Divestment Performance Monitor (DPM), in partnership with Cass Business School. The new global database analyzes 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.

“Divestitures are a critical but often overlooked part of shaping a company’s business portfolio, offering real potential to achieve higher profitability from better capital allocation, improved focus on core activities and more funds to invest in and support gth,” said Duncan Smithson, senior director, Mergers and Acquisitions, Willis Towers Watson. “Yet our data show sellers continuing to struggle to create shareholder value from deals, as investors punish companies whose strategies and execution they disapprove of.”

Smithson added, “The success of those asset sales that did add value is likely to have been advanced by the sellers’ ability to exploit their unique insight of the businesses being sold. This will have put them in a far stronger position to command the highest price by targeting buyers that have the most to gain and negotiating with them from a stronger position.”

Willis Towers Watson’s insights from the divestment data since 2010, which looks at companies selling portions of a parent company to both listed companies and private equity buyers, include:

  • Sellers across the board struggling: The challenge of achieving value from sales during the last 10 years applies across all regions, deal sizes and industries.
  • Sellers can succeed: An analysis of the study showed that the value added by the minority of successful sellers ($2 trillion of outperformance from 45% of sellers) marginally exceeded the underperformance of the majority that struggled ($1.9 trillion from 55% of sellers).
  • The challenge when dealing with private equity (PE) buyers: From 2010 to 2018, divestitures to PE buyers (–3.3pp) underperformed those to corporate buyers (–2.2pp). While this can be partly explained by PE firms engaging with more distressed sellers, which may lead to lower returns, buy-side PE deal teams also tend to have deeper, professional transaction teams with regular deal flow, enabling them to negotiate harder. In order to optimize value and ensure buyers do not win at their expense, we believe that sellers would benefit from more thoroughly planning and preparing the business for sale.

The study also shows that many of the better performing separations have been spin-offs, which are often justified by segmenting a successful business to better demonstrate its value separately from the parent. According to Willis Towers Watson, this supports the value of pre-deal preparation and the importance of business leaders engaging internally and externally on the rationale for the deal to clearly demonstrate the value of a division being sold and the prospects for the remaining business.

“Creating value from deals is far from automatic,” said Smithson. “In difficult market conditions, how much a company can gain or lose depends on taking a more thoughtful approach. Investing the right resources to perform sell-side due diligence, preparing the business for sale and constructing a clear articulation of the rationale before a sale is critical to attracting better suitors. Buyers will make stronger offers for a deal they see as creating more value and will be less able to negotiate against a seller where detailed preparation has been completed. This is especially true when dealing with PE buyers, who have considerable M&A expertise and a track record for aggressive negotiating.

“Once a divestiture candidate has been identified, it is equally important to keep managers motivated by communicating their value to the business, reinforcing a sense of opportunity connected to the divestiture and instilling as much confidence as possible that performance will be recognized. This will have a beneficial impact across the organization and on the success of the deal.”

Willis Towers Watson methodology

  • All analysis is conducted from the perspective of public sellers.
  • Share price performance within the semiannual 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 that 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 gth. 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, optimize 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.

Endnotes

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

2. Quarterly Deal Performance Monitor, Q4/Year End 2018, Willis Towers Watson and Cass Business School