However, the high-profile activity of a few large corporate entities over the past few years – in announcing sales of what were previously regarded as fantastic acquisitions – would seem to be a reversal of good news.
Examples include Novartis selling its animal health division; BP disposing of some US$48bn of assets since 2010; supermarket group Tesco closing both its US Fresh ‘n Easy chain and multiple UK stores; and Tate & Lyle selling off its sugar factories. Each embarked on the process of divestment, hiving off what had been significant parts of the organisation.
Some businesses take radical approaches to divestment. Whitbread, for example, transformed itself from being the UK’s third-largest brewery to a hotels and restaurants chain in 2000, when it divested its entire brewing and pubs interests after more than 250 years in a £400m deal with Belgium’s Interbrew.
This metamorphosis is unusual, but there is in fact nothing new about divestment, despite the apparent increase in activity. The speed with which free financial information flows around the world allows for items of news that would not perhaps have been covered in the past, to be explored and this brings business activity
If acquisition is seen as success, should divestment be seen as failure? Not at all, concluded PwC in its 2012 report ‘Strategies for managing a successful divestiture’. The report, drawn from the insights of a round table of chief executives (CEOs), concludes that divestment is pursued to unlock value or to focus on higher growth opportunities.
These aims are the driving factors for most divestment decisions, but are not the only ones by any means. EY’s 2015 ‘Global Corporate Divestment Study’, based on interviews with 800 business executives, shows that the rationale behind divestment falls broadly into four main categories:
- Strategy: Some 55% of respondents indicated that they dispose of businesses when they no longer align with the focus that the company has embarked upon, their profitability has declined and/or they suffer from inherent instability.
- Cash requirements: Divestitures generate funds, which can be used to reduce debt, invest in the rest of the business or be deployed to acquire a more strategically aligned business. Fifteen per cent of respondents sold primarily to raise cash.
- Shareholder/stakeholder pressure: Key shareholders or stakeholders can have a strong influence on decisions to divest. Sixteen per cent of respondents indicated that their primary driver was pressure from investors.
- Opportunistic: Fourteen per cent had sold a business when they felt that the offer on the table was simply too good to refuse, although they were not actively seeking a buyer. Interestingly, 47% indicated that they would sell if the premium offered were more than 10% of the underlying value.
How does a company decide when and how to review its business? Firms should be reviewing their portfolio of activity on a regular basis, to ensure value for money and strategic alignment. Two in three of those involved in the EY study saw an increased valuation multiple in the remaining business after the divestment. Even so, care should be taken as no more than 19% achieved the three success criteria identified by the report. A successful divestment should meet these three: having a positive impact on the valuation of the company, generating a sale price above expectations and completing on time.
With careful analysis of industry benchmark data, capital investment requirements and good financial management data, companies should be able to ascertain which areas they are best advised to focus on. The better the quality of the data, the better informed the company will be.
Of course divestment is not the only conclusion to draw from a review. Underperformance by a business may well be due to lack of investment and the strategic review should consider reform or investment, as well as disposal, when considering options.
When asked what steps would have made the portfolio review more effective, executives were fairly evenly split between eight factors that they felt could have improved the review process. These included better business analytics tools, more frequent reviews, the use of benchmarks, more reliable financial data and improved communications. Finance and treasury involvement at all stages would most certainly assist with better decision-making.
Who is involved?
The inclusion of better financial information does rather beg the question about whether finance and treasury is included in their strategic portfolio reviews. Of the four stages of portfolio review highlighted in the EY report – setting the review agenda; collecting data and running analysis; interpreting the results; and making the strategic decisions – roughly half of the respondents said that they did not include the finance department at any stage, with no more than 29% including finance for the strategic decision making. This short-sightedness might explain why so many business executives felt that the review process was not run as well as it might have been.
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