SE Asian Corporates Warming up to Divestments, Says EY

Southeast Asian (SEA) corporates are warming up to divestments as close to a quarter (24%) of those surveyed plan to divest within the next two years, up from 15% in 2014, according to the EY Global Corporate Divestment Study 2017.

The study, which surveyed over 900 corporate and private equity executives globally including over 70 across SEA, also revealed that the key external driver for SEA businesses to pursue divestments are shifts in technology and digital innovation.

More than half (56%) of the SEA businesses surveyed have divested due to risks or opportunities related to technological change.

Other external factors that are key in driving divestments include macroeconomic volatility (48%), shareholder activism (19%) and geopolitical uncertainty (18%). This contrasts against global findings where macroeconomic volatility (62%) was cited as the top external driver, followed by risks or opportunities in technological change (50%), geopolitical uncertainty (39%) and shareholder activism (23%).

Additionally, close to three-quarter of the SEA respondents (global: 67%) say that the risks and opportunities related to technological change will increase their likelihood to divest in the next year.

Other external drivers for future divestments are macroeconomic volatility (SEA: 65%, global: 76%), shareholder activism (SEA: 36%, global: 38%) and geopolitical uncertainty (SEA: 32%, global: 56%).

“Divestment is a mainstream capital management tool,” says Abhay Bangi, Partner, Transaction Advisory Services, Ernst & Young Solutions LLP.

“Companies sell non-core and slow-growth businesses to fund investments in their core portfolio. Interest in corporate asset sales is on the rise across Southeast Asia, fueled in part by a rapidly changing business landscape. As the global economy settles into a new growth pattern, SEA companies will need to make informed decisions tied to portfolio rebalancing.

“Also, companies are increasingly embracing digital means to transform – from product offerings to services to the way these are delivered and how they engage their customers, and these have an influence on divestment intentions.”

Vikram Chakravarty, EY Asean Managing Partner, Transaction Advisory Services, Ernst & Young Solutions LLP adds: “The most important focus of any capital decision should always be long-term strategy and business fundamentals.

“Regular portfolio review can help to identify assets that are underperforming. Companies that divest because of performance issues that signal long-term value erosion are far more likely to have a successful divestment than those that divest because of external forces.”

Advanced analytics for better and faster divestment

The survey also revealed that corporate decision-makers are increasingly recognizing the value of analytics for divestments.

An overwhelming 95% of SEA respondents (global: 88%) agree that advanced analytic tools will help them make faster, better divestment decisions and improve divestment preparation.

The main benefits that SEA businesses see in taking a more analytical approach to divesting are  greater speed of due diligence and deal execution (53%), more insightful diligence (42%), greater insight into value drivers, performance and risk (38%), and greater confidence in divestment decision (38%).

“There is no single formula for the perfect divestment,” explains Bangi. “But a number of leading practices, such as the use of analytic tools to gain better insights and perspectives into the landscape and the organization’s processes and performance, can support divestment decisions and preparation.”

Careful management is critical to preserve value

On their recent divestment, most companies (SEA 79%, global 76%) believe that it created long-term value.

The most important initiatives for enhancing sale value were developing a value creation road map (SEA: 26%, global: 11%), highlighting the tax upsides to purchasers (SEA: 23%, global: 21%) and presenting the synergy opportunity for each likely buyer (SEA: 19%, global: 10%).

For those that saw value erosion in their last divestment, the main causes were a lack of focus or competing priorities (SEA 55%, global 47%), performance of the business deteriorated during the sale process (SEA 45%, global 50%), lack of fully developed diligence materials, leading buyers to reduce price (SEA 44%, global 48%).

Bangi adds: “Remaining flexible on the perimeter of assets for sale, conducting commercial diligence on assets being sold, communicating the tax upside to buyers, dedicating enough resources and establishing a good governance model have all proven to be important and leading practices in maximizing value from a divestment.”

For his part, Chakravarty concludes that “having depth – and not just breadth – in a country or a category so as to dominate market share is critical to the growth and profitability of companies in SEA.”

Chakravarty noted that pruning non-core units on a regular basis allows companies to allocate capital towards achieving depth.