Its global corporate divestment study of more than 900 executives found changing technology, customer tastes and shareholder pressure are encouraging companies to streamline their operations.

More than four out of five companies (81%) say streamlining their operating model will impact their divestment plans this year, demonstrating a growing desire for companies to be more agile as they face new and existing competition.

Paul Hammes, EY global divestiture advisory services leader, said: ‘This is a marked shift from only two years ago when divestments were not as widely viewed as the strategic enablers they are today.’

Divestments are more likely to be proactive, high-impact initiatives than reactive responses to change, the survey shows. Within the next 12 months, 70% of companies expect large-scale transformational divestments, up from 50% in 2018. Companies that cite a business unit’s weak competitive advantage as a driver in their latest divestment (a reactive decision) fell significantly to 69% from 85%.

The number of companies that say macroeconomic and geopolitical triggers will factor into divestment decisions has dropped to roughly half (51%) from 62% in 2018. Companies may have grown more accustomed to global uncertainty: 74% still expect geopolitical shifts to push operating costs higher, and 69% wonder whether they can expect existing cross-border trade agreements to remain intact.

Sector convergence is more likely to drive the divestment decisions of 70% of executives. To that end, 80% of companies expect the number of technology-driven divestments to rise in the next 12 months, compared with 66% last year.

Over half (60%) of companies reinvested proceeds from their last divestment into new products, markets and geographies. EY says this strategy helps companies better respond to cross-sector opportunities and can create longer-term value for shareholders and the company.

According to the survey findings, having a strong value story, backed by early preparation that will address the questions of a broad buyer pool, is more important than ever. Two-thirds (67%) of sellers say the price gap between buyers and sellers is greater than 20%; last year, only a quarter of sellers reported such a gap.

Private equity (PE) buyers are looking for assurance that the carve-out has been fully prepared for separation.  A quarter of PE firms say a well-thought-out, stand-alone case and a related cost model are key to keeping them in the sales process, and half say access to granular data has been a key factor in their decision about whether to stay in an auction process.

Detail is important, but so is accuracy: 39% of PE bidders say that if the business misses forecasted performance, they would drop the price or walk away.

Hammes said: ‘PE firms compete hard for quality assets, but corporates need to come to the table with the right story – and supporting facts – to make buyers comfortable with their decision to move forward. Overlooked details or unfounded optimism can quickly trigger a loss of confidence.’

EY’s global corporate divestment study 2019 is here.

Report by Pat Sweet