In 2016, we witnessed unprecedented divestment activity in the technology sector, with many large tech firms increasing their emphasis on portfolio review processes and making decisions about the strategic future of their companies.
In the hardware segment, consolidation is ongoing and incumbent tech companies continue to reposition portfolios away from slowing hardware markets. In 2016, we saw hardware divestments from major tech companies and other category leaders.
While our survey results suggest that most tech firms are not planning significant divestment activity in 2017, they would be remiss not to invest time and leadership attention into evaluating their portfolios. Divestment of non-core businesses is an effective way to streamline the core business and raise needed capital to support growth.
Those who continue to serially acquire without engaging in healthy portfolio pruning will be less prepared to lead, as the next wave of disruptive forces — including machine learning, intelligent things, blockchain and augmented reality — reshape the technology sector.
More than any sector, technology companies are wired to grow. This growth drives company valuations and management decision-making. While looking ahead to the next acquisition may be a more exciting strategic focus, businesses facing slower growth, or even the risk of obsolescence, create a drag on performance if not identified early and potentially carved out for sale.
Companies should take a longer-term view of trends in the industry and their effect on business performance — something that can often be sacrificed under pressure from shareholders to generate growth quarter-on-quarter.
Our results reflect this, with nearly half (44%) of technology executives saying the short-term risk of reduced profitability stemming from reduced investments in legacy and non-core assets was a challenge when it came to implementing portfolio review findings.
Seek leadership participation
Strategic emphasis and C-suite involvement are critical to an efficient portfolio review, which should identify parts of the portfolio that drag down growth and profitability or are consuming management's time.
C-suite direction prompts regular reviews and a more responsive divestment culture in a way that can't be achieved further down in the organization. Leadership should also communicate the value created by the review process to drive internal stakeholder engagement.
Dedicate the right resources
With an agenda set at the highest levels, an organization can mobilize resources in sufficient quantities to make the process more efficient and timely. Companies should also invest in the right systems. Detailed and credible data should drive portfolio decisions, yet only 8% of technology companies in our survey have access to data below the business-unit level. Despite the low figure, it's a significant improvement over last year, when only 3% used sub-business-level data, and 66% were looking at segment-level information. Analyzing and interpreting this data is also a challenge, as 46% of tech companies report.
Technology companies are also planning to invest further in data analytics capabilities. Nearly three-quarters (72%) expect to use more historic descriptive analytics over the next two years, and a similar number (74%) anticipate increased use of predictive analytics. Overall, 89% of executives say advanced analytical tools would help them make faster, better divestment decisions.
Tech firms are starting to look to other sectors for guidance on divesting. Deciding which businesses to divest and then successfully completing these deals requires experience, skill and patience not prevalent in the tech sector.
Seek experience from outside: Tech companies can leverage lessons from and hire talent from sectors with more divestment experience to optimize their own portfolios.
Prepare the business for sale: If companies are to achieve the value they seek, doing the heavy lifting of sale preparation is essential. Yet our survey finds the technology sector lags behind others in this regard: only 38% of tech companies say they created a stand-alone operating model to reflect the buyer pool, compared with half of executives across all sectors.
In addition, less than two-thirds of tech companies (61%) spent time enhancing revenues to create value in the business to be divested. In the hardware segment, just 44% of companies did so. This compares with 72% that undertook such value-creation initiatives across all sectors.
Amid the challenges to divesting, IP issues rank highest in the technology sector by a large margin. Among the 80% of executives citing IP as a challenge for divestment, 61% consider it their greatest hurdle.
When preparing for divestment, it is vital to identify which entities own which aspects of IP early on and devise a workable solution well in advance of selling. Regular IP inventories conducted as a matter of course can help identify interrelationships and dependencies and flag issues that may crop up down the line.
Armed with a clearer understanding, it is much easier to develop plans to either bypass IP issues or to resolve them before an asset comes to market. It's a process that can take time — in our experience, companies can take months to find a solution.
But as always, divestment value is better protected when sellers pre-empt questions from potential buyers, tie up loose ends and present an attractive package to bidders.
The buyer pool for technology assets is growing ever larger. As digital disruption transforms all sectors, from industrial businesses and financial services to consumer products and health care, businesses are looking to transform delivery, customer experience and operational models to generate growth and cut costs. These companies are looking squarely at the technology sector to provide solutions that address threats to their business and exploit new opportunities.
In addition to non-tech corporate buyers, private equity (PE) firms have become a driving force in technology deals. Specialist PE firms have increased in number, and generalist firms have bolstered their technology focus.
With more new and often unexpected potential buyers for technology assets, companies need to cast the net wide: consider all types, take advice on where demand is strongest for the type of business you are selling and take steps to ensure that the unit to be divested is well prepared for different types of buyers.
Seize the opportunity of a welcoming market
According to EY’s global technology M&A reporting, tech sector acquisition activity has grown at a compound annual growth rate (CAGR) of 26% from 2009, when it fell to its lowest post–financial crisis level, to 2016’s $466.6b. Further, we believe global dealmakers today still have strong dealmaking intentions for 2017.
While this focus on inorganic growth indicates a healthy tech sector, M&A should be driven by portfolio review process and divestment of assets that do not support company strategy and vision. Divestments may be more difficult, complex and time-consuming to execute than acquisitions, but they are necessary to grow the core business.
The digital revolution will require many to reinvent themselves, much as other sectors have done over decades. And technology companies would do well to learn from the experience of those that have already been down this path. As the pool of potential buyers grows ever deeper, the divestment opportunities for technology companies have never been stronger.