Dive Brief:
- About half of companies buying other businesses' divested assets in the first half of the year outperformed an industry benchmark by an average of 1 percentage point, while two-thirds of companies divesting assets during that period underperformed by 7 percentage points, a survey by consulting company Willis Towers Watson found.
- The study shows the size of divestments affects the performance of the divesting company. Companies divesting up to 5% of their total company value underperformed the market by an average of less than 1 percentage point, while those divesting more than 15% underperformed by an average 6.3%.
- "Most companies are set up to buy assets, not sell them, which means decisions to sell are often made at the wrong time or in the wrong manner," Duncan Smithson, senior director of mergers and acquisitions at Willis Towers Watson, said in the survey report. "Such mistakes are expensive."
Dive Insight:
Willis Towers Watson conducts its Divestment Performance Monitor semiannually with help from Cass Business School in London. It weighs 251 divestitures with a value of at least $50 million against the MSCI world index, which tracks large and mid-cap equity performance across 23 developed countries.
The exception to the under-performance of divestitures, the survey found, involved spinoffs. Spinoffs, which involve creation of a new, independent company, is primarily done because the company believes the spinoff will be worth more as an independent company than as a part of the larger entity. Smithson said this exception likely exists because these types of transactions are far more complex than a straight sale of assets. The necessary preparation that must go into a spinoff better prepares the company to shape a healthy deal rather than a reactionary transaction, which is more likely to erode value.
Smithson said companies are likely to remain under pressure to make divestments to streamline product portfolios. "Activist investors will […] continue to push some companies to divest assets to reinvigorate company growth and unlock shareholder value," he said.
