Divestments in the turmoil
1
Divestments in the turmoil
Credit restrictions, the economic slowdown
and turbulences in the main markets
have shaped a complex environment
within the past few years for companies
to develop their businesses. For many,
these conditions have brought on negative
effects such as the loss of return on assets
or funding problems.
As a result, factoring in the pressure on
a company´s funders has gained more
prominence when it comes to making
corporate decisions, demanding healthier
balance sheets (with better net debt/
EBITDA ratios) and higher cash availability.
To relieve the tension between the funders
and the management team as it aims to
maximize long-term value for shareholders
in the best possible way, it is necessary
to develop a more proactive management
of the business portfolio in order to
maximize the cash inflow and strengthen
the company’s strategy. Even when urgent
liquidity needs require asset divestments
that under other conditions would not
arise, it is advisable to consider the impact
on the company’s long-term strategy
in order to structure the operation in
the most advantageous way. It will also
be necessary to assume a high level of
flexibility in decision making, to have the
appropriate team in place and follow a
well-defined and sequenced process.
This document presents Accenture’s vision
on how companies that are planning
on starting a divestiture process can
maximize the benefit from the operation
in an adverse environment such as the
actual one.
2
How the current environment
affects divestment decisions
Following the European Central Bank
(ECB) decision back in 2001 to start
lowering interest rates (from 4.75
percent to 2.0 percent in June 2003),
a period of easy access to credit
started and as a consequence, the
amount of M&A activity rose (peaking
at a volume of 1.400 billion dollars
in 2007 in the Eurozone). At that
time, corporate decisions were mainly
being based on strategic criteria, with
companies searching for operational
internationalization or portfolio
diversification.
Those companies that executed profitable
operations that increased their value
and were strategically complementary
are showing healthy and stable balance
sheets these days and are in an
advantageous position to invest in new
assets. For instance, in the recent past,
one of the biggest and most innovative
technology and Internet services
providers acquired a successful web
broadcasting service, which enabled the
company to consolidate its leadership in
the three main Internet service markets:
mail, Web searches and video. This
transaction went over very well with the
markets (a +35 percent in share price in
one year after the deal was announced).
It was understood that apart from the
increase in revenues from advertisement
and purchase of content the added
value was set on the ability to generate
synergies that would strengthen the
company’s position as a search portal and
technology platform developer.
The financial services industry also
presents examples which are quite
illustrative, particularly within Southern
3
European banking groups. One of them
was even recognized by specialized
financial press for building a successful
portfolio diversification strategy, with
assets spread between developed and
high growth markets. In each of the
markets, its high market share has
enabled the bank to produce not only
strong revenues but also industryleading efficiency. This strategy has
allowed the bank to withstand significant
turmoil in its home market, being one
of very few developed market banks to
undertake growth-driven acquisitions in
recent times.
Indeed, the current M&A landscape looks
very different from the one in 2002-2007.
The gradual increase in interest rates
started by the Fed and ECB unmasked the
high levels of debt in both American and
European companies. Soon, an increase in
control and credit restrictions ensued for
financial entities, triggering an economic
slowdown that still remains in many
of those economies. This situation has
directly affected companies’ capacity
for generating cash, so that, instead of
making new acquisitions, they are
forced to consider divesting assets so
as to maintain the financial stability of
their businesses.
As a consequence, a significant reduction
in M&A activities globally, (mainly in
Europe, where transactions declined by
48 percent between 2008 and 2012,
according to Mergermarket) puts an end
to six years of continuous growth. Now,
the market is dominated by divestment
transactions, marking a change of
financial and strategic interests.
Figure 1. Eurozone’s M&A activity evolution (2002 – 2012)
8.000
1.600
7.000
1.400
6.000
1.200
5.000
1.000
4.000
800
3.000
600
2.000
400
1.0000
200
-
2002
2003
2004
2005
2006
Volume (USD bn)
2007
2008
2009
2010
2011
2012
Numbero fo deals
Source: Mergermarket M&A Round-up 2012
The necessity to divest has been
increased in many cases by the difficulty
in making return on some assets acquired
during the previous economic cycle.
Where it wasn’t possible to obtain good
results and the correct strategic fit (i.e.,
synergies, new markets entries, access to
raw materials, etc.), it is common to now
find high levels of leverage and net debt/
EBITDA ratios.
It is in these cases where liquidity
needs, balance sheet reinforcement
and requirements from creditors have
gained relevance, while those aspects
that are purely strategic are abandoned.
In addition, these factors may also be
combined with each other, for example,
a divestiture in order to strengthen
the company’s balance sheet will have
an effect on its credit rating, thus
facilitating access to financing.
are no investors with buying intentions
in the market. In fact, we are witnessing
the emergence of some investors with
available funds who, stimulated by really
attractive multiples are positioning
themselves as the main “players” in the
market (for example, companies from
emerging markets and sovereign wealth
funds). Another side effect of the current
disinvestment trend is that buyers have
come to play a dominant role in the
M&A market, demanding ever more
advantageous conditions.
In short, the context in which business
operations are conducted has changed
significantly in recent years, increasing
both the pressure and the complexity
of the disinvestment operations. For the
seller, maximizing the value of those
transactions without weakening the
strategic aspect of its business is a real
challenge to face.
However, the adversity of the economic
environment does not mean that there
4
5
Portfolio management as a
strategic axe and driver for
divestment processes
Ideally, to obtain optimal asset
management, a balance must be achieved
between strategic issues and financial
needs, which implies that disinvestment
policies should be aligned with corporate
strategy. However, in the current reality,
it is common for financial needs to gain
more importance, pushing companies
to implement divestment processes that
strategically are not convenient. Due to
this situation, a proactive approach, that
enables maximizing both the value of the
transaction and the cash injection derived
from it, seems necessary.
Shared experiences from managers who
have overseen processes of this kind
show that the key for disinvestment with
a strategic approach is for a company to
look at asset segmentation from a double
perspective:
•Identifying the compatibility of
assets with the long-term corporate
strategy, for example, by analyzing
market position, the access to raw
materials or suppliers, existing
synergies or overlaps in business
models, etc.
•Evaluating the asset’s return on
performance. Those assets with
return on capital employed (ROCE)
that exceed their cost of capital will
be creating value for the company.
However, due to the lack of liquidity
of numerous companies, the ability
for generating cash from each asset
should be taken into account, noting
which investments are necessary as
well as their financial cost.
Applying this methodology, it is possible
to implement an asset rotation policy
adapted to the strategy and its financial
performance, providing the anticipation
and the level of flexibility needed for this
kind of processes.
•Core assets have a positive return and
are part of the company’s operative
core. The strategy centers around
these assets that create value to the
company, strengths the company
initially would not get rid of.
•Strategic divestments are assets
that create value and provide cash to
the company but won’t fit with the
long-term corporate strategy. These
are assets with a good perception in
the market.
•Turnaround assets might have shown
negative performance (they are not
generating value and/or consuming
cash), but their development is crucial
to the company’s strategy. The priority
is to get their performance back
and consolidate them as company
strengths. In the case of an important
European automotive group, ever since
the entrance of its new management
team, the company has managed to
retrieve the profitability of operations
from its main assets (three wellknown car brands ) from 1.5 percent
trading margin to close to 4.5 percent
recently. The Group redefined its
strategy with an intense rebranding
process (for example, launching new
attractive models), the relocation of
the production in its home country for
those products with higher margins and
the identification of synergies with a
newly acquired brand.
•Opportunistic divestment assets
are not aligned with the company’s
strategy and have a lower profitability
than expected. Between 2008 and
2010, an automotive giant sold its
luxury subsidiaries to a group of
international investors for more
than 2 billion euros. They had seen
that this set of assets was no longer
contributing as much to the group’s
results and that this type of products
were not aligned with the group’s
core business.
6
Performandce¹
Figure 2. Asset classification matrix (performance – strategic fit)
Core Assets
Strategic Divestments
High performance and
adecuated strategic fit
High performance and lower
strategic fit
Turnaround
Oportunistic Divestments
Low performance and high
strategic fit
Reduced performance y low
strategic fit
+
-
-
+
Strategic Fit
¹ Performance: value creation (RoCE>WACC) and cash generation
When divesting nonstrategic assets
becomes the focus of a proactive asset
turnover (especially in this situation),
it still may not satisfy the short-term
financing needs of a company. In fact, it
is common that tension exists between
shareholders who prioritize strategic
issues on divestment processes and
creditors/lenders who put their focus
instead on solving the liquidity tensions
and leveraging the business (long term vs.
short term).
From the perspective of cash injection,
creditors/lenders will put on pressure to
divest assets with good performance,
which are considered strategic
divestitures when they don’t generate
problems and don’t fit the company’s
strategy. Otherwise, when the need for
cash in the short term requires core asset
divestments, the management team may
opt for strategies that do not involve
a loss of control, for example, partial
divestment, IPO of a minority stake,
convertible bond issuances, etc. The
recent IPO of a telecom group’s subsidiary
is proof of how it is possible to obtain
high return from a divestment without
losing control (over 1.5 billion euros cash
injection, retaining the majority stake of
the business).
7
Underperforming assets logically
represent less of a priority divestment in
terms of short-term liquidity needs, as
the market may penalize that situation by
also offering lower attractive multiples.
In this situation, the management team
should try to get rid of non-core assets;
in other words, executing opportunistic
divestments that would not only result
in a cash influx, but also a reinforcement
of the company’s core businesses. In
such a case, it would be wise to choose
to employ a turnaround of the asset
prior to its sale, in order to maximize the
transaction’s value. Finally, and as stated
before, a turnaround strategy should also
be applied to those strategic assets with
lower performance, consolidating them
into becoming one of the strengths of the
company.
The matrix in Figure 3 reflects the
different divesting strategies that
consider short-term potential cash
needs together with strengthening the
company’s strategy and long-term value
generation.
Performance¹
Figure 3. Asset divestment strategies combining cash injection priority with strategic matters
+
-
Divestment minority stake
but remaining in control
Divesting priority
Retein and recover its
performance
Turnaround + sale/
directc sale
-
+
Strategic fit
Lower cash injection S/T -
+ Higher cash injection S/T
Weakening strategic L/T -
Strengthening strategy L/T
8
Keys to maximize value
from a divestment in an
adverse context
In an environment where there is a
critical need to obtain cash, the pressure
to divest urgently increases the risk to
neglect other possible side effects of the
transaction itself, which could mean a
lower valuation than initially expected.
Judging from our expertise, Accenture
believes the following key points should
be present throughout the whole
divestment process:
•The preparation of a disinvestment
strategy. There is a direct correlation
between the available time for
preparation and the multiple achieving
in the negotiation. It is vital to develop
a proactive rotation policy; this
represents the most effective way to
fight the lack of negotiating power.
While divestments may not report the
same performance as in the past, the
best way to combat this fact is with
sound preparation.
•High flexibility levels to allow closing
transactions in reduced periods of
time and under different conditions,
fundamental to the seller. To achieve
this, consideration of different
divestment scenarios is recommended
(i.e., including different assets, carveout structures, negotiation schemes,
9
the possibility of executing dual track
processes, etc.) with the purpose of
adaptation to both the financial needs
and the demands from possible buyers.
•Putting together an integrated and
experienced multidisciplinary team.
During a divestment process, a number
of considerations are combined, each
one with its own interests, which can
put the entire transaction at risk. To
ensure the correct management of
expectations, agendas and information
flows, it will be necessary to form
a team with different profiles (i.e.,
financial and accounting, operations,
human resources and communication)
and experience in similar processes.
•Following a strong divestment
process. Executing the deal while at
the same time controlling each phase
helps ensure the execution both in time
and manner, as well as helping to avoid
deviations that may erode the value
of the transaction. Special attention
is required when separating the
asset, ensuring smooth transition and
standard continuity of usual business
from day 1 (i.e., prioritizing goals per
business unit, minimizing collateral
effects on clients, communicating
adequately to concerned staff, etc.).
In short…
Divestments are extremely complex
processes in which risk and uncertainty
play a significant role, especially when
taking into account the current credit
crisis, the sluggish economy and the high
volatility of the markets. This situation
has further complicated the position of
the vendor, who is nowadays facing a
market environment where buyers hold a
dominant position and valuation multiples
are noticeably lower.
In order to address these circumstances,
the first step is to understand the
above-mentioned changes in the market
dynamics and to monitor carefully
what have been the most relevant best
practices recently. Likewise, applying
the key findings discussed in this article
could help to o significantly maximize the
outcome of the transaction.
Finally, relying on an objective advisor
who is skilled in these sorts of deals and
fully committed to the achievement of
outcomes could represent the deciding
factor in accomplishing divestments
during the turmoil.
Accenture has a global M&A team
with comprehensive experience in
divestment and carve-out projects in
different markets and sectors, and
strong commitment to its clients
through its highly result-oriented
practices.
Alberto Zamora
[email protected]
Efraín Olalla
[email protected]
10
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with 281,000
people serving clients in more than
120 countries. Combining unparalleled
experience, comprehensive capabilities
across all industries and business
functions, and extensive research on
the world’s most successful companies,
Accenture collaborates with clients to
help them become high-performance
businesses and governments. The
company generated net revenues of
US$28.6 billion for the fiscal year ended
Aug. 31, 2013. Its home page is
www.accenture.com
Join the conversation via:
@Accenture
www.linkedin.com/company/accenture
www.facebook.com/accenture
Copyright © 2014 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.