Divestments in the turmoil

Transcription

1 Divestments in the turmoil

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3 Divestments in the turmoil Credit restrictions, the economic slowdown and turbulences in the main markets have shaped a complex environment within the past few years for companies to develop their businesses. For many, these conditions have brought on negative effects such as the loss of return on assets or funding problems. As a result, factoring in the pressure on a company s funders has gained more prominence when it comes to making corporate decisions, demanding healthier balance sheets (with better net debt/ EBITDA ratios) and higher cash availability. To relieve the tension between the funders and the management team as it aims to maximize long-term value for shareholders in the best possible way, it is necessary to develop a more proactive management of the business portfolio in order to maximize the cash inflow and strengthen the company s strategy. Even when urgent liquidity needs require asset divestments that under other conditions would not arise, it is advisable to consider the impact on the company s long-term strategy in order to structure the operation in the most advantageous way. It will also be necessary to assume a high level of flexibility in decision making, to have the appropriate team in place and follow a well-defined and sequenced process. This document presents Accenture s vision on how companies that are planning on starting a divestiture process can maximize the benefit from the operation in an adverse environment such as the actual one. 2

4 How the current environment affects divestment decisions Following the European Central Bank (ECB) decision back in 2001 to start lowering interest rates (from 4.75 percent to 2.0 percent in June 2003), a period of easy access to credit started and as a consequence, the amount of M&A activity rose (peaking at a volume of billion dollars in 2007 in the Eurozone). At that time, corporate decisions were mainly being based on strategic criteria, with companies searching for operational internationalization or portfolio diversification. Those companies that executed profitable operations that increased their value and were strategically complementary are showing healthy and stable balance sheets these days and are in an advantageous position to invest in new assets. For instance, in the recent past, one of the biggest and most innovative technology and Internet services providers acquired a successful web broadcasting service, which enabled the company to consolidate its leadership in the three main Internet service markets: mail, Web searches and video. This transaction went over very well with the markets (a +35 percent in share price in one year after the deal was announced). It was understood that apart from the increase in revenues from advertisement and purchase of content the added value was set on the ability to generate synergies that would strengthen the company s position as a search portal and technology platform developer. The financial services industry also presents examples which are quite illustrative, particularly within Southern European banking groups. One of them was even recognized by specialized financial press for building a successful portfolio diversification strategy, with assets spread between developed and high growth markets. In each of the markets, its high market share has enabled the bank to produce not only strong revenues but also industryleading efficiency. This strategy has allowed the bank to withstand significant turmoil in its home market, being one of very few developed market banks to undertake growth-driven acquisitions in recent times. Indeed, the current M&A landscape looks very different from the one in The gradual increase in interest rates started by the Fed and ECB unmasked the high levels of debt in both American and European companies. Soon, an increase in control and credit restrictions ensued for financial entities, triggering an economic slowdown that still remains in many of those economies. This situation has directly affected companies capacity for generating cash, so that, instead of making new acquisitions, they are forced to consider divesting assets so as to maintain the financial stability of their businesses. As a consequence, a significant reduction in M&A activities globally, (mainly in Europe, where transactions declined by 48 percent between 2008 and 2012, according to Mergermarket) puts an end to six years of continuous growth. Now, the market is dominated by divestment transactions, marking a change of financial and strategic interests. 3

5 Figure 1. Eurozone s M&A activity evolution ( ) Volume (USD bn) Numbero fo deals Source: Mergermarket M&A Round-up 2012 The necessity to divest has been increased in many cases by the difficulty in making return on some assets acquired during the previous economic cycle. Where it wasn t possible to obtain good results and the correct strategic fit (i.e., synergies, new markets entries, access to raw materials, etc.), it is common to now find high levels of leverage and net debt/ EBITDA ratios. It is in these cases where liquidity needs, balance sheet reinforcement and requirements from creditors have gained relevance, while those aspects that are purely strategic are abandoned. In addition, these factors may also be combined with each other, for example, a divestiture in order to strengthen the company s balance sheet will have an effect on its credit rating, thus facilitating access to financing. However, the adversity of the economic environment does not mean that there are no investors with buying intentions in the market. In fact, we are witnessing the emergence of some investors with available funds who, stimulated by really attractive multiples are positioning themselves as the main players in the market (for example, companies from emerging markets and sovereign wealth funds). Another side effect of the current disinvestment trend is that buyers have come to play a dominant role in the M&A market, demanding ever more advantageous conditions. In short, the context in which business operations are conducted has changed significantly in recent years, increasing both the pressure and the complexity of the disinvestment operations. For the seller, maximizing the value of those transactions without weakening the strategic aspect of its business is a real challenge to face. 4

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7 Portfolio management as a strategic axe and driver for divestment processes Ideally, to obtain optimal asset management, a balance must be achieved between strategic issues and financial needs, which implies that disinvestment policies should be aligned with corporate strategy. However, in the current reality, it is common for financial needs to gain more importance, pushing companies to implement divestment processes that strategically are not convenient. Due to this situation, a proactive approach, that enables maximizing both the value of the transaction and the cash injection derived from it, seems necessary. Shared experiences from managers who have overseen processes of this kind show that the key for disinvestment with a strategic approach is for a company to look at asset segmentation from a double perspective: Identifying the compatibility of assets with the long-term corporate strategy, for example, by analyzing market position, the access to raw materials or suppliers, existing synergies or overlaps in business models, etc. Evaluating the asset s return on performance. Those assets with return on capital employed (ROCE) that exceed their cost of capital will be creating value for the company. However, due to the lack of liquidity of numerous companies, the ability for generating cash from each asset should be taken into account, noting which investments are necessary as well as their financial cost. Applying this methodology, it is possible to implement an asset rotation policy adapted to the strategy and its financial performance, providing the anticipation and the level of flexibility needed for this kind of processes. Core assets have a positive return and are part of the company s operative core. The strategy centers around these assets that create value to the company, strengths the company initially would not get rid of. Strategic divestments are assets that create value and provide cash to the company but won t fit with the long-term corporate strategy. These are assets with a good perception in the market. Turnaround assets might have shown negative performance (they are not generating value and/or consuming cash), but their development is crucial to the company s strategy. The priority is to get their performance back and consolidate them as company strengths. In the case of an important European automotive group, ever since the entrance of its new management team, the company has managed to retrieve the profitability of operations from its main assets (three wellknown car brands ) from 1.5 percent trading margin to close to 4.5 percent recently. The Group redefined its strategy with an intense rebranding process (for example, launching new attractive models), the relocation of the production in its home country for those products with higher margins and the identification of synergies with a newly acquired brand. Opportunistic divestment assets are not aligned with the company s strategy and have a lower profitability than expected. Between 2008 and 2010, an automotive giant sold its luxury subsidiaries to a group of international investors for more than 2 billion euros. They had seen that this set of assets was no longer contributing as much to the group s results and that this type of products were not aligned with the group s core business. 6

8 Figure 2. Asset classification matrix (performance strategic fit) Core Assets Strategic Divestments Performandce¹ + - High performance and adecuated strategic fit Turnaround Low performance and high strategic fit High performance and lower strategic fit Oportunistic Divestments Reduced performance y low strategic fit - + Strategic Fit ¹ Performance: value creation (RoCE>WACC) and cash generation When divesting nonstrategic assets becomes the focus of a proactive asset turnover (especially in this situation), it still may not satisfy the short-term financing needs of a company. In fact, it is common that tension exists between shareholders who prioritize strategic issues on divestment processes and creditors/lenders who put their focus instead on solving the liquidity tensions and leveraging the business (long term vs. short term). From the perspective of cash injection, creditors/lenders will put on pressure to divest assets with good performance, which are considered strategic divestitures when they don t generate problems and don t fit the company s strategy. Otherwise, when the need for cash in the short term requires core asset divestments, the management team may opt for strategies that do not involve a loss of control, for example, partial divestment, IPO of a minority stake, convertible bond issuances, etc. The recent IPO of a telecom group s subsidiary is proof of how it is possible to obtain high return from a divestment without losing control (over 1.5 billion euros cash injection, retaining the majority stake of the business). Underperforming assets logically represent less of a priority divestment in terms of short-term liquidity needs, as the market may penalize that situation by also offering lower attractive multiples. In this situation, the management team should try to get rid of non-core assets; in other words, executing opportunistic divestments that would not only result in a cash influx, but also a reinforcement of the company s core businesses. In such a case, it would be wise to choose to employ a turnaround of the asset prior to its sale, in order to maximize the transaction s value. Finally, and as stated before, a turnaround strategy should also be applied to those strategic assets with lower performance, consolidating them into becoming one of the strengths of the company. The matrix in Figure 3 reflects the different divesting strategies that consider short-term potential cash needs together with strengthening the company s strategy and long-term value generation. 7

9 Figure 3. Asset divestment strategies combining cash injection priority with strategic matters + Divestment minority stake but remaining in control Divesting priority Performance¹ - Retein and recover its performance Turnaround + sale/ directc sale - + Strategic fit Lower cash injection S/T - Weakening strategic L/T - + Higher cash injection S/T Strengthening strategy L/T 8

10 Keys to maximize value from a divestment in an adverse context In an environment where there is a critical need to obtain cash, the pressure to divest urgently increases the risk to neglect other possible side effects of the transaction itself, which could mean a lower valuation than initially expected. Judging from our expertise, Accenture believes the following key points should be present throughout the whole divestment process: The preparation of a disinvestment strategy. There is a direct correlation between the available time for preparation and the multiple achieving in the negotiation. It is vital to develop a proactive rotation policy; this represents the most effective way to fight the lack of negotiating power. While divestments may not report the same performance as in the past, the best way to combat this fact is with sound preparation. High flexibility levels to allow closing transactions in reduced periods of time and under different conditions, fundamental to the seller. To achieve this, consideration of different divestment scenarios is recommended (i.e., including different assets, carveout structures, negotiation schemes, the possibility of executing dual track processes, etc.) with the purpose of adaptation to both the financial needs and the demands from possible buyers. Putting together an integrated and experienced multidisciplinary team. During a divestment process, a number of considerations are combined, each one with its own interests, which can put the entire transaction at risk. To ensure the correct management of expectations, agendas and information flows, it will be necessary to form a team with different profiles (i.e., financial and accounting, operations, human resources and communication) and experience in similar processes. Following a strong divestment process. Executing the deal while at the same time controlling each phase helps ensure the execution both in time and manner, as well as helping to avoid deviations that may erode the value of the transaction. Special attention is required when separating the asset, ensuring smooth transition and standard continuity of usual business from day 1 (i.e., prioritizing goals per business unit, minimizing collateral effects on clients, communicating adequately to concerned staff, etc.). 9

11 In short Divestments are extremely complex processes in which risk and uncertainty play a significant role, especially when taking into account the current credit crisis, the sluggish economy and the high volatility of the markets. This situation has further complicated the position of the vendor, who is nowadays facing a market environment where buyers hold a dominant position and valuation multiples are noticeably lower. In order to address these circumstances, the first step is to understand the above-mentioned changes in the market dynamics and to monitor carefully what have been the most relevant best practices recently. Likewise, applying the key findings discussed in this article could help to o significantly maximize the outcome of the transaction. Finally, relying on an objective advisor who is skilled in these sorts of deals and fully committed to the achievement of outcomes could represent the deciding factor in accomplishing divestments during the turmoil. Accenture has a global M&A team with comprehensive experience in divestment and carve-out projects in different markets and sectors, and strong commitment to its clients through its highly result-oriented practices. Alberto Zamora alberto.zamora@accenture.com Efraín Olalla efrain.olalla@accenture.com 10

12 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with 281,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, Its home page is Join the conversation Copyright 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.