Companies are facing intense pressure to evolve their business models using rapidly advancing technology. And they continue to navigate ongoing macroeconomic and geopolitical issues like the recent US tax reform and Brexit. All of these pressures are placing divestments at the core of their growth and transformation strategy.
As new technologies power innovation, business models in almost every industry look starkly different than they did just a few years ago. Cloud computing is prompting a wholesale shift to the platform economy, where the “as-a-service” model now dominates. Digital technologies such as social and mobile have significantly changed the way consumers interact with many businesses. In manufacturing, 3D printing promises to transform supply chain and logistics practices, negating the need to ship parts that can simply be printed on-site. And automated processing is driving efficiency savings in every part of the service economy.
As companies revisit their business model, around three-quarters (74%) of executives agree that the changing technology landscape is directly influencing their divestment plans, up from 55% in 2017. The challenge today’s companies face is deciding what, where and when to divest.
Sector convergence trends may widen the pool of potential buyers, but it also creates more competitive tension among sellers. Sixty-five percent of companies expect to see divestments related to industry consolidation over the next 12 months.
As a result, sellers should take an outside-in perspective of their business portfolio — understanding shifts in customer expectations, future revenue models and growth trajectories, as well as competitive positioning.
The key divestment driver continues to be a business unit’s relative weakness in competitive position in its marketplace — cited by 85% of companies in the latest findings, up from 49% in 2017. Half of companies (50%) planning a divestment say they intend to use the proceeds to fund investment in new technology.
Companies who divest in order to focus on top-performing assets, particularly where new technology can provide a competitive edge, are 21% more likely to achieve an above-expectation sale price than opportunistic divestments. Companies that divest to fund new technology investments are 48% likelier to achieve a higher valuation multiple on the remaining business post-divestment than those that divest opportunistically.
Those companies divesting to fund technological change are primarily looking to improve operating efficiency (82%) and address changing customer needs (80%) in their remaining businesses. However, investment in technology that will deliver product innovation — currently a focus for only 43% of companies — may deliver greater long-term value.
Another way companies are addressing the need to compete, and making up for technology shortcomings, is by taking a more creative approach to divestments. As businesses pursue new technology-driven opportunities, more companies are considering cross-sector deals and alternative structures. Almost half of companies (46%) recently opted for alternative structures, including partial divestments, joint ventures, and revenue sharing and collaboration agreements, nearly twice as many as in our 2017 study. Such approaches are often driven by the need to invest in emerging technologies resident in young, innovative companies with little market presence but with the potential to transform a buyer’s business model.
More than ever, tax is affecting sellers’ ability to achieve desired results. Tax policy can make divestment plans less viable or, alternatively, offer new opportunities to improve value. Eighty percent of companies highlighted tax policy changes as one of the most significant geopolitical shifts that may affect their plans to divest. New policies are reshaping the tax profile of businesses, from US tax reform to the OECD/ G20 Base Erosion and Profit Shifting (BEPS) project cascading through Europe.
While 31% of companies claim tax changes are making it more difficult to execute deals, certain policy changes — such as the reduction in US corporate rates passed at the end of 2017 — offer US corporate sellers the opportunity to significantly increase after-tax cash proceeds. For all these reasons, understanding tax dynamics is increasingly becoming essential to the strategic decision of whether and how to divest in the first place, rather than a detail handled during execution after the decision to divest has been made.
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