An unpredictable business and political landscape together with regulatory change are among top geopolitical disruptions driving companies to pursue divestments, according to the 2017 Global Corporate Divestment Study by Ernst & Young.
Businesses in Europe, the Middle East and Africa (EMEA) report that external factors, such as geopolitical concerns are the most prominent in driving divestments, with 81% pointing to regional political instability and 73% citing Brexit as among the top issues. EMEA corporates are motivated by geopolitical uncertainty nearly twice as much as their Americas counterparts (59% versus 30%), resulting in faster sales but lower sale prices and lower satisfaction with long-term value derived.
– 82% of companies say macroeconomic volatility will increase their likelihood to divest over the next year
– 48% believe tax-related divestment challenges have increased in the last 12 months
– 88% say advanced analytics would help make faster, better divestment decisions
The study also found significant regional variances in divestment success across the globe, owing to the emphasis placed on speed versus value. Only 62% of EMEA companies say their divestment created long-term value versus 88% in the Americas and 80% in Asia-Pacific. For businesses in EMEA, 43% prioritize speed of closure over value compared to just 18% in the Americas and 29% in Asia-Pacific.
In the Americas, 57% of multinationals say that their divestment decisions are motivated by technological change. An overwhelming 84% are also focused on new regulatory changes. Globally, political instability is having a significant impact on divestment decisions as well, with 56% of all respondents saying they are more likely to divest as a result of an unpredictable landscape.
Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services, says:
“In many cases, we are observing impulsive divestment decisions by companies feeling pressured by external factors to take quick action, often at the cost of realizing maximum value. The impact of too much speed on sale price is significant, and should motivate companies to be strategic and measured by prioritizing value when navigating a sale process.”
Two sides of tax reform
Tax has become a matter of increasing concern for businesses considering divestments, while the shifting tax landscape also brings opportunities the survey finds. Nearly half (48%) of companies surveyed believe tax challenges have increased and complicated divestment execution over the last year. When it comes to strategy, 80% of businesses say pre-sale preparation to mitigate price reductions for tax risks have been effective.
Paul Hammes, EY Global Divestiture Advisory Services Leader, says:
“The current tax environment is the most challenging for companies in recent memory. Dramatic policy shifts across the globe, and an increasing lack of certainty are leaving many corporations wondering where to place bets and to cut losses.”
Leveraging technology to future-proof businesses
Today, more than ever before, corporate decision-makers are recognizing the value of analytics. An overwhelming 88% of corporates say that advanced analytics would allow them to make faster and better divestment decisions and improve divestment preparation.
Descriptive and predictive analytics are widely acknowledged as effective in portfolio decision-making. While only 21% of executives cited effective prescriptive analytics during the divestment process, 49% of top performers cited the same, which is also a 28 percentage point increase over the broader population. However, prescriptive analytics – those that help assess how to optimize performance based on a given business strategy – have yet to win over the 48% of corporates who do not use them or say they are not effective.
When it comes to using technology platforms broadly to improve a company’s operating model, 49% of companies are looking to invest in technologies including robotics, artificial intelligence (AI), software as a service (SaaS) and Internet of Things (IoT) to make future divestments more efficient. This is especially important to automotive companies, with 73% of those corporates intending to invest in technology for this purpose.
Hammes says: “Digital is no longer just a component of our world, but central to it. Our clients realize that capitalizing on the right technological advancements will better position them for success. They are also using technology to vet opportunities and inform better decision-making, creating reliable value for the long term.”