Is technology shaking up the tech sector? From cloud computing to the Internet of Things, technology is indeed upending tech business models as well as products and services. Market leaders from the 2nd Platform space are reshaping their portfolios, as they identify aging businesses or products that may fail to compete in a landscape now being driven by the global adoption of cloud services, mobility, social technology and big data analytics.
The speed of adoption is also accelerated by a more decentralized IT function, with end users having greater control over the technology an organization will deploy. In other words, the 3rd Platform of computing has arrived, with the accompanying changes on multiple fronts pushing many in the sector to undergo their own transformations.
Industry players and private equity are in the market to acquire such assets and can employ rigorous management strategies to create value for the underlying businesses.
Who’s disrupting whom? No wonder market-leading technology companies that were born in the 2nd Platform space of the mid-1980s — built around client or server systems, mainframes and applications — are in a race to reshape their portfolios to compete in this new arena. Indeed, the disrupters are soon to find themselves disrupted if they don’t seize new opportunities. This is imperative as new market entrants move from idea to incubation to growth faster than ever before — uprooting many existing ideas, idols and incumbents along the way.
The good news: our survey suggests that most tech firms are planning significant divestment activity in 2018.
The challenge: taking the necessary steps to ensure companies are well positioned to capitalize on the upcoming divestment cycle.
Decades of hyper growth have afforded technology companies the luxury of being less disciplined with portfolio reviews. However, as legacy products mature, it is clear that enterprises need to improve their portfolio review processes to proactively determine the best avenues for future growth.
The best way to do this:
Deploy a fluid and agile process. Companies should frequently revisit their portfolio strategy to increase flexibility and efficiency in decision-making.
Use data and analytics to make informed decisions about the portfolio. Companies should ensure portfolio reviews are occurring with the right data at the right level of depth.
Commit to the process, dedicate resources and allocate capital according to the findings. Companies that are performing adequate portfolio reviews still may struggle to implement the findings, as 69% cited making the findings a strategic imperative a significant challenge and 51% said they were not allocating sufficient resources to implement findings. Further, companies need to trust the results from the portfolio review process, as 56% of tech executives struggle to implement findings due to short-term risk of reduced profitability caused by reducing investment in legacy businesses. The highest-performing companies have shown they commit to the portfolio review process by:
Sound portfolio practices discussed above should help technology businesses identify divestment opportunities. However, many factors can still affect a company’s ability to achieve a successful exit. For example, 84% of tech execs anticipate a value gap of greater than 10% in perceived value versus anticipated sale price.
To have a full understanding of the true value of the divestment assets, bear in mind the following quantitative aspects during the pre-deal preparation phase:
Produce the data to support the sale process.
Assess product families on a stand-alone basis and be mindful of improper shared services allocations. Isolate P&Ls for each product family to understand the underlying unit economics behind each product. Be mindful of shared services, which are likely allocated to different product lines or business units through a high level company-wide allocation methodology.
Perform pre-sale financial due diligence and transaction analytics. Thoroughly vetting all data to be provided to potential buyers in the pre-sale process allows the seller to maintain control and properly position issues that buyers might find and focus on during their diligence phase. This preserves value and credibility, allowing for a faster divestment process. Thorough preparation is particularly important when the divestment candidate assets are trading at lower multiples due to a weaker market position.
Deal with any tax structure issues early. In the pre-sale process, take steps to assess the potential tax risks associated with the divestment. According to 59% of tech executives, a lack of preparation in dealing with tax risk eroded deal value, while 29% say the most beneficial pre-sale preparation step would have been to mitigate price reductions for tax risk.
Even when quantitative indicators point to divestment, companies planning a divestment should consider separation planning and execution services to mitigate the qualitative considerations associated with separating integrated offerings.
Unwind customer contracts: 32% of executives say unwinding customer contracts prior to divestment remains a major concern (up from 25% in 2016). One customer contract may involve the sale of multiple products and services from different business lines in the portfolio. Companies need to ensure these contracts are restructured to drive customer satisfaction and retention post-divestment.
Restructure sales incentives that involve cross-selling multiple products. Just under a third (28%) of technology executives say separating combined sales incentives for integrated offerings was one of their top divestment challenges. These need to be reevaluated in the event of a divestment to keep sales personnel motivated.
Determine whether the business being divested affects any core functions. 27% of technology executives cited dependence on assets or personnel that could affect core business functions as a top divestment challenge. The product being divested may be critical to the functionality of the company’s broader stack — does the company’s solution still hold together without this technology? Team members may be inextricably linked with the business being divested — can the core business afford the loss of experienced personnel?
Invest time and resources in the process. Two-thirds (66%) of technology executives cite competing priorities and a lack of focus as the main cause of value erosion in their last divestment. Successful divestment requires a structured process with resources committed from the top of the organization (i.e., the C-suite).
One of the biggest challenges any business faces is how it thinks about tomorrow. This is especially true in the turbulent tech industry — where today’s winners (and winning products and services) may quickly find themselves treated as legacy businesses tomorrow. Market leadership today too often means market weakness or extinction tomorrow for those companies that do not find a way to periodically reinvent themselves.
Innovation by nature is a cycle full of ebbs and flows. Most companies know they need to stay ahead of the ever-accelerating pace of change if they intend to remain in position to disrupt trends.
Are you planning a significant divestment in 2018? If the answer is yes, it is safe to say you are in good company with the majority of the tech sector executives who participated in our survey. With thorough portfolio review processes and divestment preparation, our findings suggest a successful exit and your next-generation venture are well within reach.
Technology Divestment Study PDF