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Market disruption and geopolitical uncertainty accelerate corporate divestments

2017.04.05
  • 77% of Japanese companies say macroeconomic volatility will increase their likelihood to divest over the next year
  • 51% of these companies say they plan to use divestment proceeds to invest in digital capabilities
  • 80% say advanced analytics would help them make faster, better divestment decisions

TOKYO, April 5, 2017 - An unpredictable business and political landscape and regulatory change are among top geopolitical disruptions driving companies to pursue divestments, but for different reasons depending on their geographical footprint, according to the EY 2017 Global Corporate Divestment Study - the sixth edition of an annual survey of more than 900 corporate executives in Japan and worldwide.

Businesses in Japan report that external factors--such as geopolitical concerns--are the most prominent in driving divestments, with 73% pointing to changes in regulations and 53% citing cross-border political sanctions leading to a change in competitive dynamics as being among the top issues. When it comes to Brexit, only 13% of Japanese executives cited it impacting their decision to divest compared to 73% of their European counterparts.

In the study, 60% of Japanese businesses say that their recent divestment decisions were motivated by macroeconomic volatility and 40% were driven by the need for technological change (including digital). At the global level these factors are even more important with 77% and 66% of all respondents saying macroeconomic volatility and technological change, respectively, will most likely prompt their companies to divest over the next year.

When it comes to digital, 47% of Japanese corporates say that changes to the digital landscape, and therefore the competitive landscape, are directly influencing their future divestment plans and 51% say they plan to use divestment proceeds to invest in digital capabilities.

The study also found significant regional variances in divestment success across the globe, owing to the emphasis placed on speed versus value. Only 69% of Japanese companies say their divestment created long-term value versus 88% in the Americas, 80% in Asia-Pacific and 62% in Europe, the Middle East and Africa (EMEA). For businesses in Japan, 31% prioritize speed of closure over value compared to just 18% in the Americas, 29% in Asia Pacific and 43% in EMEA.

This prioritisation of the speed of closure is likely linked to concerns over protecting value during the sale process. More than half (58%) of executives cited deterioration of business performance during the sale process as the cause of value erosion in their last divestment, indicating the need for continuing to create value in a business even though it is to be sold. 38% of Japanese executives say value creation during the sale process was very effective in their last major divestment. When it comes to pre-sale value-creation initiatives, 71% of Japanese corporates enhanced revenue (e.g., product improvement or distribution expansion), 69% extracted working capital and 62% improved operations to reduce costs and improve margin.

Value creation was also identified as a critical means of addressing the price gap in a divestment process. 62% of Japanese executives say there was more than a 10% price gap between what sellers expected versus what buyers were offering. In order to bridge the price gap and enhance sale value, 30% of the respondents say they operationally separated the business partially or fully created standalone operating models reflecting the buyer pool and 28% say they optimized legal structure (e.g., putting carved out assets into a new legal structure).

However, 62% of Japanese businesses say the biggest challenge in maximizing the value of a divestment is making the portfolio review a strategic imperative for their business. They also cited poor communication between the board/strategy team and M&A team, and not understanding the new disruptive forces that impact value in their business, as being key hurdles to their portfolio reviews. 58% agree shortcomings in the portfolio review process have sometimes resulted in failure to achieve the intended divestment results.

Vince Smith, EY Japan Transaction Advisory Services Leader, says: "Japanese corporates have historically been reluctant to divest noncore or low performing businesses. However, unprecedented market disruption such as increasing pressure from shareholders, macroeconomic uncertainty, and the need for technological change, is driving divestments in an accelerated manner. Frequent portfolio reviews and assessment of market dynamics and competitor actions are key to maximize the sale price and create value for Japanese businesses and their shareholders."

Today, more than ever before, Japanese corporate decision makers are recognizing the value of analytics in their portfolio reviews and in the sales process. An overwhelming 80% of Japanese corporates say that advanced analytics would allow them to make faster and better divestment decisions and improve divestment preparation. Japanese companies believe analytics is the key to leveraging disruption to gain competitive advantage. 61% of Japanese corporates say analytics instills greater confidence in divestment decisions and 44% say they can obtain greater insight into value drivers, performance and risk through analytics.


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