Geopolitical uncertainty and technological change are driving divestment strategies for companies worldwide, especially those in EMEA, according to EY’s 2017 Global Corporate Divestiture Study.
New technology, digital capabilities, tax upsides and data analytics are emerging as increasingly important divestment trends for 2017, according to the report, which is based on interviews with more than 900 corporate executives from nine different sectors.
Divestment strategies based on external factors such as geopolitical turmoil and macroeconomic volatility have largely produced disappointing outcomes. Corporate executives identified macroeconomic volatility (62%), including oil prices and currency rates, as the most common external factor that they considered during their most recent divestment. However, companies are 20% less likely to achieve a sale price above expectations when they divest as a result of such macroeconomic factors.
Likewise, according the report, companies that divest as a result of geopolitical instability are “31% less likely to achieve a sales price above expectation”. The report indicates that geopolitical uncertainty in 2016, including Brexit, the US presidential election and the rise of populist movements, influenced 39% of divestments conducted by companies worldwide.
EMEA executives were the most likely to identify geopolitical concerns as the reason for their divestments (59%), ahead of the US (30%) and Asia-Pacific (22%). EMEA companies “are most likely to prioritise speed over value in a deal – often leading to a lower sale price” when confronted with geopolitical uncertainties, says the report.
EY global divestment leader Paul Hammes explains that the election of Donald Trump created a “level of certainty” for US companies, built on lower corporate tax rates and fewer regulations. As a result, the US economic environment has become more predictable, allowing companies to consider valuation over speed when they divest.
Meanwhile, divestments related to the long-term strategies of companies, such as technology-related operations, frequently exceeded valuation expectations. “Some 74% of companies achieve a sale price above expectation when they divest because of technology versus geopolitical uncertainty,” according to the report. Unlike external factors, divestments aimed at improving technology can help further innovation.
In order to deliver divestments with favourable valuations, the report emphasises the importance of the execution process, including portfolio reviews. “These disruptive factors need to be considered in the portfolio review process, and they need to be considered early,” advises Mr Hammes.