Divestments are set to soar in Asia, EY’s 2016 Global Corporate Divestment Study has found – and one of the main reasons companies plan to sell or spin off assets is to fund growth.
For the global M&A markets, 2015 was the biggest year on record, and divestments (sometimes called “divestitures”) were an important part of that story. Around the world, corporates are increasingly looking to divestments to fund long-term growth opportunities, allowing management to focus on the core and shed underperforming businesses.
In the last 12 to 18 months, businesses in the Asia-Pacific region have turned dramatically to divestment as a strategy.
Nearly half of all Asia-Pacific corporations polled by EY are planning a divestment within the next two years, compared with just 15% a year ago. Intentions in Asia-Pacific are now similar to companies globally: in Asia-Pacific, 47% of corporations are planning at least one divestment within the next two years – close to the 49% for companies globally.
Raising funds to support growth plans is one of the main reasons corporates are divesting. In Asia-Pacific, 73% of firms that responded to EY’s divestment study (similar to the 70% globally) are using divestments to fund growth – with 35% planning to reinvest proceeds in the firm’s core business, 24% planning to fund expansion into new products or markets, and 14% dedicating the cash to further M&A.
The big increase in using divestments as a way of generating funds for growth, and focusing on where to take the business, contrasts with three or four years ago; then most companies were divesting because they had to fix up their balance sheets after getting into financial trouble.
In addition to providing a source of funds for future growth, or otherwise helping their balance sheets, by divesting companies often experience a further benefit through an increase in value of the remaining business post divestment. In Asia-Pacific, 81% believe their divestments create long-term corporate value in the remaining business.
It’s quite a change to see Asian companies take the view, more prevalent internationally, that divesting can be an aggressive business strategy. Traditionally, we have seen Asian companies focused on buying and building the corporate empire.
However, we may be getting to a point that Asian executives are thinking about what it is exactly that they own, and whether conglomerates really deliver the best value. In Korea, for example, and this is fairly consistent across a number of Asian countries, conglomerates have built themselves up with all sorts of strange and wonderful businesses, which don’t necessarily align. It’s rather like conglomerates in the United States in the 1970s and early ‘80s, when a company such as ITT was invested in multiple industries, owning telecoms, heating & air-conditioning, insurance, hotels & resorts and so on, before it was broken up in the mid-1990s.
We’ve seen companies in the US, increasingly so in the last 10 or 15 years, going back to core and getting rid of assets that are not necessarily part of that. A recent example is GE divesting its financial services business, because that was not really its core skill or what it does best and what it wants to be doing going forward.
EY’s 2016 “Global Corporate Divestment Study” is based on interviews with 900 global corporate C-suite executives and 100 private equity executives, as well as on external data from nearly a decade’s worth of divestments. All the executives interviewed had been involved in at least one major divestment in the past three years.
For more from the study, click here.
By Stephen Lomas, Asia-Pacific Divestments Leader, Transaction Advisory Services