How can divesting fuel your future growth? - Germany Global Corporate Divestment Study 2018 - EY
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How can divesting
fuel your
future growth?
Germany
Global Corporate Divestment Study 2018
The better the question. The better the answer.
The better the world works.
About the study
Focus areas Sector insights
► Market forces ► Automotive
driving divestments ► Consumer products and retail
► Strategic reviews ► Financial services
and making the ► Industrials
decision to divest
► Life sciences
► Improving
► Media and entertainment
divestment planning
► Oil and gas
and execution
► Power and utilities
► Private equity
► Technology
► Telecommunications
Participant profile
► Results based on interviews with 900+ corporate executives
conducted between October and December 2017; separate survey
of 100 private equity executives during the same time frame
Produced in *
► Companies from 60 countries and 11 industry sectors association with
► 85% CEOs, CFOs or other C-level executives
* FT Remark is the research and publishing arm of the Financial Times Group
Page 1 Global Corporate Divestment Study 2018Key global findings
87% of companies are planning to divest within the next two years
Market forces
Lessons learned:
74% 80% ► Consider how technology is changing
say the changing say tax policy changes are your business model
technology landscape is a geopolitical driver in their ► Divest to get a competitive edge
directly influencing their plans to divest. ► Understand tax implications
divestment plans.
Strategic reviews
Lessons learned:
56% 64% ► Develop an “always-on” approach
say they held onto assets struggle to identify a team ► Build a decision analytics platform
too long when they should with the right analytics and ► Ramp up analytics skills
have divested. technical skills to drive
portfolio reviews.
Deal planning and execution
Lessons learned:
60% 42% ► Create value ahead of the sale process
continued to create value say not presenting the ► Tailor the synergy opportunity
in a business they business as stand-alone ► Prepare for separation early
planned to divest. “scared off” buyers or ► Improve communication
prompted lower bids.
Page 2 Global Corporate Divestment Study 2018Germany key findings
are planning to divest within the next two
85% years.
say the changing technology landscape is directly
78% influencing their divestment plans.
say tax policy changes are a geopolitical driver in
71% their plans to divest.
say they held onto assets too long when they
46% should have divested.
say not presenting the business as a stand-alone
37% “scared off” buyers or prompted lower bids.
Page 3 Global Corporate Divestment Study 2018Global number of divestments slightly down
in 2017 – but still on a high level
Q Number of Divestments
10.132 10.328 10.269 10.145
8.550
7.787
7.415
6.795
2010 2011 2012 2013 2014 2015 2016 2017
Page 4 Global Corporate Divestment Study 2018Number of divestments by far highest in US,
followed by China and UK
Q Number of Divestments
Germany France UK China US
2.732
2.600 2.620 2.596
2.087 2.066
1.886
1.758
1.312
1.069 1.025 1.042
785 753 770
710 734
589 624
574 531 540559 540
495473 463 480463 458474 493
431 428 396354 409
371
333335
2010 2011 2012 2013 2014 2015 2016 2017
Page 5 Global Corporate Divestment Study 2018Global value of divestments slightly up in
2017 – but significantly lower than in 2014/15
Q Value of divestments (US$ bn)
2.007
1.906
1.655 1.657
1.473 1.514
1.292
1.241
2010 2011 2012 2013 2014 2015 2016 2017
Page 6 Global Corporate Divestment Study 20182017: Value of divestments down in US and
China – yet up in Germany and UK
Q Value of divestments (US$ bn)
Germany France UK China US
751
679
591
575
562
547
416
349
334
232
200 192
148
119 121
102 107102
85 88 82 94
82 72
67 64 67 59 68
49 52 60 71 71 62
45 36 46
33 29
2010 2011 2012 2013 2014 2015 2016 2017
Page 7 Global Corporate Divestment Study 20182017: Value of divestments highest in
industry for second consecutive year
Q Value of divestments (US$ bn)
Automotive Life Sciences Technology Financial Services Consumer products Industrials
308
225
197 198 196
190
182 178 178
176 176171 176
164 165 164
159 159 160 160 155
149
143
135 135
128 126 127
122 118
116 114 116
92 92 96
82
71 74
46
39 39
24 29 29
22 19
21
2010 2011 2012 2013 2014 2015 2016 2017
Page 8 Global Corporate Divestment Study 2018What’s driving the appetite for divestments? Page 9 Global Corporate Divestment Study 2018
Technology is changing business models
Companies are facing intense pressure to evolve their business models using
rapidly advancing technology.
Global companies that divest to fund new technology Key questions:
investments are ► Do our businesses fit into
our future operating model?
48% likelier to achieve a higher valuation multiple on the
remaining business post-divestment than those that divest ► Do we need capital to invest
in new technology?
opportunistically.
► Should we invest proceeds
69% of German companies expect to see more divestment in a different sector to
activity due to industry consolidation over the next 12 months. enhance our product line or
operating model?
Companies that expect to initiate their next divestment
The answer:
within the next two years Take an “outside-in” perspective
2018 of the business, looking at shifts
85% in customer expectations, future
87% revenue models and growth
trajectory for the business, as
2017 well as competitive positioning.
46%
43%
Germany Global
Page 10 Global Corporate Divestment Study 2018Divest to get a competitive edge
For 85% of executives globally, the top divestment Q Which triggers prompted your most recent major
driver continues to be a business unit’s weak divestment? Select all that apply.
competitive position in the market – up from 49% in
Unit’s weak competitive position in the market
our 2017 study. 88%
85%
Across all countries, companies that divest in order
to focus on top-performing assets, particularly Opportunistic (including unsolicited approach by a buyer)
where technology can provide a competitive edge, 73%
are 21% more likely to achieve a higher-than- 71%
expected sale price than those that divest
Geopolitical uncertainty/macroeconomic volatility
opportunistically.
53%
47%
Those German companies looking to divest to fund
new technology investments are looking to: Need to fund new technology investments
► Improve operating efficiency, 81% 41%
43%
► Address changing customer needs, 81%
Shareholder activism
18%
Consider using creative deal structures – such as
partial divestments, joint ventures, revenue sharing 16%
and collaboration agreements – to address the need
to compete.
Germany Global
Page 11 Global Corporate Divestment Study 2018Expect geopolitical issues to persist
Q Which of the following geopolitical shifts may Key considerations:
affect your plans to divest? Select all that apply.
► Be cautious as buyers will take a
Labor/immigration laws
85%
similar view of macroeconomic and
86% geopolitical risks.
Brexit
85%
► Evaluate whether the time is right to
42%
divest.
Tax policy changes
71%
► Minimize negative impacts on price by
80%
screening buyers and target those less
concerned about macroeconomic and
Cross-border trade agreements geopolitical impacts.
66%
62%
► Buyers may be direct competitors or
companies operating in relevant
geographies – so a broad auction may
help retain pricing tension in the
Germany Global
divestment process.
Page 12 Global Corporate Divestment Study 2018Understand tax reform implications
on divestments
► Tax can make divestment plans less viable or, alternatively, offer new opportunities
to improve value.
► New policies are reshaping the tax profiles of businesses, from US Tax reform to
the OECD/G20 Base Erosion and Profit Shifting (BEPS) project cascading through
Europe.
► In the US, the reduction of the corporate tax rate offers US sellers the opportunity
to increase after-tax cash proceeds.
► Understand the tax dynamics early when making the strategic decision on whether
or not to divest, rather than during execution.
22% of German companies say tax
changes are making it more difficult to
execute deals.
Page 13 Global Corporate Divestment Study 2018How do you make the decision to divest? Page 14 Global Corporate Divestment Study 2018
Don’t act too slowly
Q How frequently do you assess your portfolio to
determine business units or brands to grow or divest?
Twice a year
44%
47%
Annually
44% Companies globally those
42%
that conduct portfolio
Quarterly reviews annually are twice as
6% likely
6% to exceed performance
expectations for divesting
As necessary/opportunistically
5%
“at the right time.”
4%
However, 46% of German
Every two years companies say they held
1% onto assets too long.
1%
Germany Global
Page 15 Global Corporate Divestment Study 2018Build an “always-on” portfolio review
process, supported by analytics
Key steps of the portfolio review Analytics to support your portfolio decisions
Define your strategic objectives
Develop key metrics
Performance (descriptive) analytics focuses on the base
Phase 1
Agree on ratings and weightings for metrics business and its historical performance, including strategic,
financial and operational levers.
Collect and analyze data
Develop base-case valuation and dashboard
Build or customize scenario model Applied (predictive) analytics provides insight into the
likely future performance of the business and helps optimize
Assign business units to preliminary buckets: grow, exit, fix, sustain decision-making — based on predictions and other broader
market factors.
Evaluate standalone impact of potential actions
Phase 2
Combine actions into plausible scenarios for value assessment
Evaluate pro forma range of metrics Dynamic decision-modeling (prescriptive) analytics
helps make strategic and operational decisions based on
Recommend portfolio strategy and execution plan predictive scenarios to optimize portfolio performance —
including divestment decisions.
Phase 3
Execution through divestments, acquisitions, joint ventures, tax
structurings, margin enhancements and enterprise cost reductions
Page 16 Global Corporate Divestment Study 2018Look at the big picture
Start your review process by asking the following questions:
► Do we have the right capital structure to meet our strategic priorities?
► What is the best way for our company to grow — and is it aligned with our
core businesses?
► What steps can we take to enhance our portfolio’s performance?
► How can we improve the performance of our assets?
► Are we the best owner of certain assets?
These answers will help develop the divestment road map, giving the board and
the strategy team a framework for further discussion — and action.
Page 17 Global Corporate Divestment Study 2018Lead with a data-driven story
► Assess proprietary financial and
operational data alongside
external data to understand
current valuation, growth
objectives and return on capital. 74% of German companies leveraged
advanced analytics to understand the
true value of a non-core asset in their
► Define what you want to last divestment.
accomplish in the portfolio
review: Are you analyzing at the
level of business unit, category
or brand?
► Determine the key metrics that
will be used to make decisions. Across all countries, companies that
consistently apply data-driven analytics
to decision-making are 33% likelier to
► Apply those metrics to take an
exceed price expectations
unbiased perspective of your
in their divestments.
assets.
Page 18 Global Corporate Divestment Study 2018Ramp up analytics skills
Q What do you consider a challenge associated
with your portfolio reviews? Select all that apply. To improve portfolio reviews,
Understanding how technology impacts the value of our business
you need to identify the right
74% team to drive the process:
80%
Overcoming emotional attachments to assets/conflicts of interest
69% ► Build a team with a mix of deep
61% business knowledge, functional
Making the portfolio review process a strategic imperative skills and analytics experience.
68%
69%
► Finding the right talent may
Consistently applying data-driven analytics to drive decision-making require one or a combination of
63% the following: hiring, acquiring a
54%
company with the expertise,
Identifying the right team to drive the process
(i.e., the right set of skills from a business, technical and analytics perspective) outsourcing or retraining your
58% workforce.
64%
Improving communication between board/strategy team and M&A team
53%
59%
Germany Global
Page 19 Global Corporate Divestment Study 2018Performance (descriptive) analytics Learn from past behaviors and unearth value-driving insights with performance (descriptive) analytics. Look at data from: ► Customers ► Cash flows ► Logistics ► Workforce For example, analyze historical customer buying patterns to determine product preferences and streamline the sales cycle. Performance analytics and visualization tools can help define divestment parameters for the board and the strategy team. Global companies that use these tools are 24% likelier to achieve a sale price above expectations, and 20% likelier to complete the deal faster than expected. Page 20 Global Corporate Divestment Study 2018
Applied (predictive) analytics
Companies are successfully Q Within the next two years, will you use the
using applied analytics to: following more, less or same? (Germany)
Predictive analytics (e.g., statistical techniques, machine learning, and data
► Understand the impact of mining that analyze current and historical facts to make predictions about
divestment scenarios future outcomes)
91% 8% 1%
► Identify operational
improvements
Social media analytics
► Determine where to make
71% 24% 5%
incremental investments and
measure impact on growth
Prescriptive analytics (e.g., algorithms that suggest actions to benefit from
predictions and respective implications)
70% 20% 10%
Global companies with effective Descriptive analytics (e.g., historical-based analysis)
predictive analytics are 81% likelier to 50% 41% 9%
achieve a sale price that exceeds their
expectations. Financial modeling
12% 70% 18%
More Same Less
Page 21 Global Corporate Divestment Study 2018Dynamic decision modeling
(prescriptive) analytics
Dynamic decision modeling (prescriptive) analytics can help companies optimize
performance across the portfolio by taking action on operational data outputs and
feeding results back into the analytics model.
Use prescriptive analytics to:
► Understand current portfolio performance and valuation
► Determine how best to allocate and raise capital
► Identify where to make investments or divestments
► Decide where to reinvest capital across the portfolio to drive growth
70% of German companies say they expect to make greater use of prescriptive analytics
for portfolio decisions over the next two years. Globally, those that use these analytics
are 76% likelier to achieve a higher than expected price for the business being sold.
Page 22 Global Corporate Divestment Study 2018Do you have the right tools and talent to maximize your divestment outcome? Page 23 Global Corporate Divestment Study 2018
Value can be lost as quickly as found
Q What do you see as the causes of value erosion in your last divestment? Select all that apply.
Lack of flexibility in structure of sale
67%
61%
Lack of focus/competing priorities
63%
56%
Lack of preparation in dealing with tax risk
58%
61%
Lack of fully developed diligence materials (including product or service road map), leading buyers to reduce price
55%
62%
Performance of the business deteriorated during the sales process
45%
44%
Business was not presented stand-alone meaning financial buyers were “scared off” or
had to estimate their own conservative stand-alone costs (leading to lower bids) 77% of German
37%
42% companies
Lack of new technology development or implementation because we don't have the expertise prioritized value
15% over speed in their
17%
last divestment.
Did not shore up cyber defenses
6%
10%
Germany Global
Page 24 Global Corporate Divestment Study 2018Make improvements before you begin the
sale process
Use analytics to create value pre-sale:
► Provide the output of advanced analytics to buyers so they can identify growth
opportunities that support higher valuations.
► Shorten the diligence period and minimize the need for transitional service
agreements (TSAs).
► Demonstrate that the business has been capitalized and operationalized and
properly prepared for sale.
Page 25 Global Corporate Divestment Study 2018Tailor the synergy opportunity
Sellers can increase value Q Which of the following steps did you undertake
by identifying: before putting the business up for sale? (Germany)
Select all that apply.
Completed operational improvements to reduce costs/improve margin
► Customer overlap and related cross- (not including workforce)
sell opportunities 71%
Right-sized the organization (i.e., workforce)
► Supplier alignment to highlight 71%
potential purchasing synergies Provided potential buyers with access to data and/or output of
advanced analytics
69%
► Operational footprint and cost base to Identification and mitigation of stranded costs (those which
identify potential rationalization remain with parent following divestment)
opportunities and ultimately 67%
cost savings Pre-sale preparation to mitigate price reductions for tax risk
65%
Present the synergy opportunity for each likely buyer
64%
Buyers expect detailed information on
Identified the intellectual property (IP) of the business
business drivers — so determine what
37%
data is needed and share it.
Page 26 Global Corporate Divestment Study 2018Prepare for separation early
Common seller missteps Why it is critical to do this right
Not preparing a detailed view of stand-alone costs Stand-alone cost estimates allow sellers to prepare to negotiate the incremental cost
for key functions (e.g., IT), with variations by buyer based on buyer type and platform. Left to their own estimates, buyers generally take a
type/platform conservative view that decreases valuations.
Failing to be clear about the scope of assets By developing a bespoke, optimized operating model for a business and highlighting
included in the deal potential synergies, sellers can articulate its value in the hands of a new owner.
Not preparing an estimate of one-time separation In carve-outs, companies that take this step are 21% likelier to achieve a sale price
costs above expectations. Buyers often overestimate one-time costs and therefore decrease
their valuation.
Not starting separation planning early, with Early separation planning helps identify potential areas of entanglement that affect the
consideration to both the transaction perimeter and TSA framework (services, pricing, etc.), the magnitude of stranded costs and the buyer
the transition of the business integration model. Long lead-time activities can delay closing for months if not
appropriately addressed.
Underestimating the legal and regulatory Certain countries require long lead times to close, due to extra steps demanded by
requirements to close complex regulatory environments (e.g., operationalizing legal entities, setting up product
registration, marketing authorizations). Unexpected delays may require implementation
of different Day 1 models in different geographies that will be ready at later dates.
Not contemplating the financial information needs Buyers may need audited carve-out financials early to obtain financing, as well as deal-
of different buyers basis financials that align to the deal perimeter. Buyers also need to get comfortable with
what they would be inheriting on Day 1, and sellers must address these information
needs to show the business in the best light.
Page 27 Global Corporate Divestment Study 2018Move quickly on tax assessment
► Conduct exit workshops to identify potential buyer types and
any tax data they may require, before a buyer is identified 29% of German
► Present both tax challenges and upsides – early, and in
executives indicated
detail – to make buyers more enthusiastic about the that over the last 12
potential of the purchase months highlighting tax
upsides to purchasers
► Assign resources to assess tax exposures across multiple better enabled them to
work streams and geographies drive value.
► Understand how the tax operating model and effective tax
rate associated with the business’s supply-chain structure
will affect a buyer’s effective rate and cash flow post-
transaction, both on income taxes and indirect taxes
► Investigate the largest jurisdictions that are material to the deal when resources or time is tight
► Emphasize the upside by building out a buyer’s potential tax benefits
► Remain flexible about deal structure, keeping the buyer’s tax position in mind (e.g., asset sale
versus a stock purchase)
Page 28 Global Corporate Divestment Study 2018Improve execution through communication
Create a stakeholder Key communications during a divestment
communication plan:
Pre-announcement:
► Clear the right people early to ► Create a compelling and clear vision of the desired
make timely decisions end-state
► Establish protocols to continue ► Develop communications on team structure, strategy
communication with stakeholders and targeted messaging for seller audiences
of any divested assets after the
► Prepare for announcement, including development of
deal is done
press releases and website messaging
► Couple communications with
other strategies, such as Post-announcement:
incentives that reward executives
► Identify labor requirements and implement a localized
on various measures of
communications approach
transaction success
► Prepare the seller’s customers, suppliers and vendors
► Consider your audience and use
for Day 1
channels (e.g., social media) that
align to their communication ► Develop and execute a talent retention plan
preferences
► Focus on engaging leadership in two-way
conversations with employees
Page 29 Global Corporate Divestment Study 2018Focus on the management team
In selecting management teams,
Q In your last major divestment, which of the following
sellers should consider internal communication strategies did you take? (Germany)
the teams’: Select all that apply.
Conducted ongoing discussions around portfolio review findings
82%
► Deep familiarity and track record 17%
with the business and its Presented appropriate models, timelines and milestones related to transaction
74%
competitive positioning 16%
► Key customer relationships Aligned work streams between internal stakeholders and service providers
67%
6%
► Vested interests and the potential
Explained the vision for the separated business and listened to employee concerns
for reinvigoration of these 62%
leaders by the potential sale 19%
Incentivized key executives to effectuate a successful transaction
► Ability to develop the go-forward 62%
8%
strategy and passionately and
Created a stakeholder communication plan
credibly present it, with a clear 49%
linkage to the forecast 28%
Focused on the quality of the management team in the divested business
► Willingness to go with the 37%
6%
business upon sale and be
locked up for an appropriate Strategy taken Strategy not taken,
time period but feel would be most beneficial
Page 30 Global Corporate Divestment Study 2018Demographics
78 German executives interviewed
Which describes the ownership of your company? What are your annual global revenues?
Publicly owned US$5bn+
53% 19%
Privately owned US$1bn-US$5bn
47% 13%
Government/state-owned enterprise US$500m-US$1bn
0% 42%
Family owned US$250m-US$500m
0% 26%
Page 31 Global Corporate Divestment Study 2018EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY’s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda. © 2018 EYGM Limited. All Rights Reserved. 1710-2438834 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made. ey.com
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