Industrials companies divest at record rate to transform their operating models. Read more.
Industrials companies divest at record rate to transform their operating models. Read more.
Eighty-nine percent of industrials executives plan to divest within the next two years — a sharp increase from 48% last year.
David Gale

David Gale

EY Americas Industrials Leader

Transaction Advisory Services

+1 612 371 8482

David.Gale@ey.com

Industrials Divestment Study

A key aspect of transformation in the industrials sector is related to technology. Forty percent of industrial companies say they recently divested to raise funds for technology investment. Going forward, 72% of companies believe that technology-driven divestments will increase in the next 12 months. Further, industrials divestments are now more likely to be driven by technological change than macroeconomic conditions. While 70% of industrials companies last year cited macroeconomic volatility as having prompted their most recent divestment, only 53% cited it this year.

So, while industrials companies continue to position their portfolios to balance exposure to macroeconomic risk, they are clearly also committing to a robust digital investment strategy.

 

How can industrials companies improve divestment timing and maximize sale price in light of urgent needs to invest in technology?

Many industrials companies now recognize the need to conduct more regular and thorough portfolio reviews, yet 76% of executives still find it difficult to make the portfolio review process a strategic imperative. And 81% of executives struggle to understand how technology impacts the value of their business.

To succeed in the long term, leaders of industrials companies must change from a product- or market-based growth strategy to one that addresses the growth of services and increasing digital disruption. Regular portfolio reviews are essential to ensuring that a company’s strategic growth plan is on track against multiple future-state scenarios.

Industrials Divestment Study

 

Continuously assess divestment scenarios across your portfolio

In the face of market consolidation, executives feel increasing pressure to remain competitive by focusing on core operations and divesting noncore assets. The leading divestment trigger for industrials companies is a business unit’s weak competitive position (86%).

However, 71% also stated that the divestment was triggered by an opportunistic buyer, including an unsolicited offer. And 90% of executives believe these unsolicited offers will increase over the next 12 months.

The Tax Cuts and Jobs Act in the US may also affect divestment activity, as 81% of industrials executives believe. Cash windfalls from reduced tax obligations could be deployed on acquisitions to further increase strong competition for industrials assets.

But rather than taking a reactive stance to market pressures, activist campaigns and unsolicited offers, industrials companies can develop scenario-based plans for potential divestments. Proactive strategies not only increase the likelihood of fending off market risks, but also increase the probability of getting a higher price for any divestment.

Companies are redefining their business strategy in a time of rapid-speed technology advancements. First, they need to understand the value of their own technology to their business. Sellers can achieve strong valuations on their businesses not only from strong operating models and legal structures, but also from clear communication about the potential impact of technology. Nineteen percent of industrials executives say they did not communicate technology’s effect on the future-state of the business, but they later determined that price would have benefitted the most from doing so.

And looking into the future, 61% of executives cite the need to fund new technology investments as increasing their need to divest over the coming year. But companies should evaluate divestments not only on the cash that can be generated to support new technology, but also the impact on the overall portfolio as the company builds out its digital capabilities and positions itself to pursue new markets.

Industrials Divestment Study

How can industrials maximize value by applying predictive and prescriptive analytics to their transactions?

Industrials executives are increasingly relying on analytics to make portfolio decisions and to support divestments. Companies should consider using all types of analytics to provide deeper insights about value. Performance (descriptive) analytics focuses on the business base and its historical performance. Applied (predictive) analytics focuses on understanding what key drivers influence an outcome.

Furthermore, dynamic decision modeling (prescriptive) analytics focuses on influencing the key features that lead to the desired outcome. Divestment teams that use these analytics effectively have deeper insights into value and are better positioned to articulate value to buyers.

Industrials companies are increasingly using predictive analytics — with 80% expecting to use predictive analytics more actively within two years, up from 58% last year. This is now on par with the cross-sector trend of 84%. We see a similar uptick with prescriptive analytics However, there is still room for growth, with just 52% of companies reporting them to be very effective.

Analytics can also provide helpful insights at the functional level, by helping companies free up working capital, predict supply chain and commercial risks for the remaining entity, optimize legal entity arrangements and more.

Don’t neglect social media

While social media analytics are usually focused on consumer awareness, this data can be leveraged to assess market risks during commercial due diligence, and also to assess competitor activities, brand value and more. While manufacturers are not often credited with leading the pack on social media, industrials companies are advancing, with 54% of executives stating their social media analytics are effective, compared with cross-sector average of 47%. There is a way to go, though, as nearly half of industrials companies are still not employing social media analytics or are not finding them effective.

Use technology to improve data collection.

Data gathered through inconsistent processes and stored in incompatible systems poses a challenge for many industrials companies that pursue advanced analytics. However, nearly half (47%) of industrials companies plan to use robotic process automation in their next divestment, and 30% plan to use machine learning, to transform their data sets into new and cost-effective sources of insight.

Industrials Divestment Study

How can industrials companies keep deals moving in a timely way while devoting enough attention to value?

More than a quarter (27%) of industrials companies see a valuation gap between buyer and seller expectations as greater than 20%, while 53% of executives see that valuation gap as between 11% and 20%. These gaps add time to the divestment process, which should be accounted for when planning. Buyers and sellers can optimize value and time to close by launching as many activities in parallel as possible and establishing strong communication among stakeholders.

Industrials Divestment Study

Companies should also take the time up front to plan for various scenarios to close deals sooner. For example, companies should conduct early sell-side due diligence, carefully identify the buyer pool and develop appropriate value expectations. Industrials companies that do this well are better equipped to present the synergy opportunities for each likely buyer. Twenty-seven percent of industrials companies cite this as the most critical step for enhancing sales value of their divestments. Another critical tool is highlighting the tax upside to purchasers – 37% of industrials companies report that they have been better able to do this over the past year.

Analytics can also provide strategic advantages in divestment preparation. Just over half of industrials executives (51%) said that, of all the steps in the divestment process, analytics created the most value in pre-sale preparation. This step includes identifying potential issues and positioning the business in a positive light. Buyer negotiations also benefit from analytics through activities, such as stress testing the business from the buyer’s perspective.

If value is in the eye of the buyer, how can sellers best protect against value erosion?

Whether selling assets to a sector peer or working with a non-traditional buyer, industrials companies must be aware of potential sources of value erosion. Industrials executives cite factors, such as lack of flexibility in the deal structure, a lack of fully developed due diligence materials, and the company’s own lack of focus and competing priorities, as top contributing factors that hamper deal value.

In an environment where it is critical to consider buyers outside of your sector, industrials companies should focus more on developing a strong value story and assessing price points and synergy assumptions in a larger buyer pool. These buyers may need additional flexibility in the deal’s structure or more detailed due diligence materials, especially if the segment of the market is not as well known to them. So, additional sell-side diligence can help create competitive tension that could favor the seller.

Conclusion
Leading industrials companies are focusing on transforming their operating models and are no longer considering their portfolios as fixed. Sixty percent of industrials executives expect industry consolidation to increase from already high rates. Industrials companies that can develop the right talent, tools and culture will be more likely to win market share as all market segments move through aggressive consolidation in the next few years.