About 63% respondents said their last divestment was driven by a need to streamline their operating model, with 86% adding that it will continue to be a key factor in their divestment plans over the next 12 months.
EY on Tuesday said in its India Divestment Study 2019 that 81% of the companies surveyed plan to undertake divestments in the next two years while 67% expect large-scale transformational divestments in the next 12 months.
The study is based on responses from more than 40 organisations in India, across sectors to gauge the success factors, challenges, collaboration landscape and growth areas for divestments in India.
About 63% respondents said their last divestment was driven by a need to streamline their operating model, with 86% adding that it will continue to be a key factor in their divestment plans over the next 12 months. Further, 70% of Indian companies said a weak competitive position was another key factor that drove their last divestment. “Evolving customer preferences, macroeconomic uncertainties, technological changes, shareholder pressure and geopolitical instability are some of the key factors that are driving companies to consider divestments,” the report added.
EY stated that businesses needed to continuously evaluate their strategy to remain competitive and have access to the required capital for investment. The report indicated 65% of the surveyed companies used the proceeds from their last divestment to invest in their core business, with 56% stating that the proceeds were used to fund investments in new products, markets and geographies.
Naveen Tiwari, partner and head, carve-out and integration at EY India, said the firm’s experience indicated that divestitures are a good source of capital for investments in core business. “Given functional inter-dependencies, legal, regulatory and tax issues, sellers need to be flexible in adopting different deal structures to meet value and time expectations from the divestment. They must continue to create value and put together a compelling story for different types of buyers in order to maximise proceeds from the transaction. This indicates a need for a well-defined portfolio strategy, coupled with the right resources and expertise to manage divestments.”
Fifty six per cent respondents also said that by not presenting, the business as stand-alone entity ‘scared off’ potential buyers, or it prompted them to estimate more conservative stand-alone costs and offer lower bids.
Forty per cent of companies expected the number of buyers outside of their sector to increase, for example, private equity (PE). “PE bidders assist sellers by bringing increased competition and a sharper focus on business value. Fifty six per cent respondents said that PE involvement increased multiples during their divestitures,” the report indicated.