Emerging economies set to become one of the key buyers of corporate assets worldwide.
M&A transactions may be below their historical peaks, but frozen credit markets and a rapidly deteriorating global economy are driving an increasing number of distressed asset sales and historic deals, according to a new Ernst & Young report.
Divesting in turbulent times: Achieving value in a buyer’s market is the first global survey of its kind charting the changing corporate approach to divesting. Over 360 c-suite level executives participated in the survey, each representing companies with an annual turnover of $1bn+; over 40 Indian companies participated in the survey.
Says Ranjan Biswas, Partner and National Director, Transactions Advisory Services at Ernst & Young India: “With limited cash and emerging economies set to become one of the key buyers of corporate assets worldwide, companies now need to think more creatively, prepare more carefully, act more decisively and with greater flexibility to ensure their deals are successful – and all within a timeframe over which they have little control.”
The Ernst & Young survey reveals that globally more than half of deal doers (53%) confirm they are more likely to consider divestments due to current economic events. The continuing need to focus on the core business emerged as the strongest imperative with 56% citing it as the most important factor when planning a divestment. Interestingly, an even higher percentage of Indian respondents (68%) mentioned this as the primary reason. Globally, disposal of non-performing assets (NPAs) came in second with 21%; a sizeable minority (23%) is looking for cash – to bolster the balance sheet, fund acquisitions or pay down debt.
Indian companies have on an average done 1 divestment in the past two years compared to 2-5 divestments of their global peers. Compared to global peers, Indian companies were quite high on confidence about having an appropriate transaction strategy - 29% Indians strongly agreed, compared to only 10% globally. A majority of Indian companies have said that they regularly examine their business portfolio and prefer strategically fit businesses in their portfolio. The most popular mode of divestment has been selling 100% stake to a third party versus forming a JV or seeking a minority investor. While, only 57% respondents from India said that they brought their divestments at the best time to the market, a whopping 86% claimed to have achieved their primary goal of maximizing value.
New set of buyers to emerge
While estimates of when the M&A market will truly recover varied, survey respondents expect a shift in buyers from domestic to overseas markets. 25% respondents globally, anticipate emerging market buyers will be the main acquirers of assets in the next two years, which is double the level of activity in the previous two years (11%). At the same time, while 42% respondents reported that domestic strategic buyers were the main acquirers in the last two years, only half of them anticipate that this would continue over the next two years. The report adds that the prevailing sentiment is one of a buyers’ market and the range of buyers has expanded to also include sovereign wealth funds and governments.
“Companies in India too are expecting a major shift in the buyers over the next 2 years. While in the last two years companies have sold their assets mostly to domestic strategic buyers, in the coming two years, most strategic buyers are expected to come from overseas, both developed as well as emerging markets. The role of private equity players is also expected to increase significantly,” says Ranjan.
”Buyers today have the rare opportunity to make acquisitions that would normally not be sold at current valuations,” he adds. “Interested companies with strong balance sheets can strike attractive deals. For all such deals to succeed, buyers and sellers will have to work in sync. Sellers need to focus on the requirements of the buyers and customize the ‘for sale’ offering for each prospective bidder to ensure that skeptical investors are convinced about the merits of the deal.”
Respondents also expect deals to be more sophisticated in process and structure, given the increasingly complex demands from buyers. The survey finds almost half (48%) are more likely to consider a multiple transaction types, including third party sales, spin-offs and joint ventures. Sellers need to now simultaneously pursue multiple divestment options to ensure successful divestitures. Increasingly, corporates are deploying portfolio management modus operandi thus far followed by private equity firms to maximize on value.”
Preparation drives value
Globally, only about one-third respondents (36%) believed their recent divestments had met expectations and 63% cited ‘lack of time’ to prepare for divestments as the biggest obstacle to successful divestment. Historically, almost two-thirds considered at least six months necessary to successfully execute a deal – a timeframe that might not always be available in today’s economic climate. Companies in exceptional circumstances may have little option but to sell quickly, possibly, at reduced valuations.
Interestingly, Indian companies were more optimistic with the timeframe, citing 3-6 months as sufficient time to prepare for and execute a divestment. In fact, most Indian companies, reflecting back on their divestments, gave higher priority to communication with employees and customers and mobilization of key personnel when considering a divestment over detailed planning.
Nonetheless, reiterating the importance of preparation Ranjan says, “For both buyers and sellers, proactive portfolio management based on comprehensive information will be important. Divestments may not yield the value they once did, but the best defense against this shift in paradigm will be preparation. In situations where companies must undertake accelerated divestment they must maintain a heightened state of readiness right across portfolios and be prepared to exit all or parts of their business at short notice.”
New game new rules
The 10 golden rules that have emerged for successful divestment in a downturn are: faster and more considered decision making through regular portfolio evaluation; define the trade-off between time and deal value; customize the business case for each potential buyer; consider the role you may need to play in the buyer’s financing; pursue multiple divestment options in parallel; be aware that traditional financial due diligence may no longer be sufficient; assume that sale processes will no longer be structured; deliver timely, regular communications to all stakeholders; develop a detailed roadmap to guide operational separation; strive to prevent material value shifts occurring during closing and post-closing.
