Asian firms must divest strategically for growth

In its study of global corporate divestment, EY finds companies in Asia-Pacific are reluctant to exit investments and use proceeds to fund expansion.

 Asian firms must divest strategically for growth

Divestments are a key way to fund business growth, but companies in the Asia-Pacific region seem somewhat reluctant to use divestment to fund future growth plans. The findings from EY’s 2015 Global Corporate Divestment Study highlight compelling reasons why they should step up the pace of selling their non-core and underperforming assets.

Pressure to improve portfolio performance and shareholder returns will make divestments a core component of companies’ capital strategy in the next year, according to the study. Nearly two-thirds of executives in Asia-Pacific (60%) expect the number of strategic sellers to increase in the next 12 months, compared to 54% globally. Asian businesses understand the value of successful divestments: 69% saw an increased valuation multiple in the remaining business after their last asset sale, and 86% used the funds from their last divestment to reinvest in their core businesses, acquire new ones or explore new products, markets or geographies, compared to only 74% of the global respondents.

Yet even as large global companies are divesting, companies in Asia-Pacific remain more hesitant to do so. In the last three years, just 31% sold an under-performing business, compared to 37% globally. For example, the major US conglomerate GE Capital recently announced the sale of its Oceania-based consumer finance business for AU$8.3 billion (US$6.3 billion) to a private equity consortium led by buyout firm KKR.

Interestingly, 30% of the Asia-Pacific respondents to the EY study said that they would not sell an asset that was strategically important to them at any price.  By comparison, the overall global figure was just 19% (see Figure 1).
Figure 1

A proven way to increase value

At a time when economic growth is still sluggish in many parts of the world and country performance is increasingly divergent, it is critical for businesses to realign their portfolios with where they expect to see the future growth. Companies are refocusing on their core strengths and growth areas, and using divestments to create capital to invest in these areas as  a critical component of that strategy.
There is no question that Asia-Pacific companies will need to jump on the divestment bandwagon.

As more Asian companies go public, they will find it necessary to deliver tangible and consistent shareholder value. With a public listing comes the need to meet shareholder expectations for profitable growth and increased scrutiny when this doesn’t happen. The vast majority of Asia-Pacific respondents to our study (81%) are publicly listed, and an increasing number of companies are listing on the major Asian stock exchanges. For example, in January 2015 the number of companies listed on the Hong Kong Stock Exchange was up 6.4% over the 12 months prior, compared to 3.6% for the NYSE, according to the World Federation of Exchanges. 

Balancing value and speed is tricky

One of the notable findings of our study is that unlike their global counterparts, Asia-Pacific businesses prefer value to speed when considering a divestment.

As many global companies realize they may be late in rebalancing their portfolios, we see a mounting urgency to act fast: 50% of the global executives responding to our study said that closing deals quickly and with certainty is more important than waiting longer to secure a higher price. Asia-Pacific companies were more cautious, however – 59% would take value over speed. The danger in this trade-off is that when companies focus single-mindedly on speed or value, they often omit the necessary steps to achieve either of those goals.

The good news is that there are ways to attain both. We suggest that Asian companies start by asking themselves the following questions:
• Where do we plan to be, geographically and strategically, in the medium and long term?
• What is the right balance of products and regions for our business?
• How do we find and maintain that balance?
• Should we divest specific businesses to reinvest elsewhere?

The answers to these questions will vary by business and sector, but our study reveals a compelling need for companies to evaluate their portfolios regularly and assess what they need to continue to own and grow, where they need to acquire, and what they should sell to fund the future investments. We recommend that Asia-Pacific businesses:

Increase the frequency of their portfolio reviews. Asian companies are more likely than their global counterparts (64% vs. 58%) to say that greater frequency would make their portfolio reviews more effective. Regular and frequent portfolio reviews help companies respond quickly to changing market conditions.

Anticipate growing activist intervention. The two main triggers for divestment are largely the same across regions:  the asset has a weak competitive position in the market or is not part of the core business. But there is one key difference. Although Asian companies are just as likely as global companies to say that activism prompted their last divestment, they are less likely (9% vs. 16%) to cite this as the most important reason (see Figure 2).

Figure 2

In light of increasing shareholder activism across the globe, Asia-Pacific businesses need to become more proactive and strategic about portfolio assessments. In the USA in particular we are seeing a significant increase in shareholder activism where companies fail to meet expectations. In some cases, this has forced boards to announce divestments of underperforming businesses or break-ups of the group.  For example, Dow Chemical announced a divestment program estimated to be worth US$8.5 billion following a period of sustained shareholder activism.  While we have seen only limited evidence of such shareholder pressure in the Asia-Pacific region, we can expect that it will start to occur in this region soon.

Access better data and develop analytical tools. Specific information such as industry benchmarks and profit/cash forecasts for business units is vital to improving portfolio reviews, as are analytical tools. Asian companies whose divestments resulted in higher valuation multiples on their remaining business were 60% more likely to have used strong analytical tools than lower-performing companies.

Tell a strong value story. Having decided to sell a business, you need to make sure you think about the buyers and tailor the value story to each likely buyer. Preparing a value creation roadmap can be highly effective in increasing the asset’s attractiveness and boosting the speed of the transaction.  Only 55% of the Asia-Pacific respondents to our study developed a value creation roadmap, but 40% found it to be the most important step to create value.

As the M&A markets rebound, now is the time for companies to streamline and optimize their portfolios, and divestments are vital to this strategy. Letting go is how a company grows.

Stephen Lomas is the Asia Pacific Divestment Advisory Services (DAS) leader and a Transaction Support partner with EY, based in Melbourne Australia.

For further information contact Stephen on (p) +61 3 9288 8441; (email) stephen.lomas@au.ey.com or connect via https://au.linkedin.com/in/stephenlomas

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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