Almost half of businesses making divestments list a need for quick cash as the major motivation behind conducting the process, new research shows.
Findings from accountancy firm Ernst & Young suggests that short-term benefits are driving divestment activity, but that some businesses are beginning to look at the long-term benefits.
Results from its 2012 Global Corporate Divestment Study finds that nearly 50 per cent of divestments in the UK over the past two years were driven by a need for quick cash rather than longer term strategic objectives.
When questioned, seven out of ten respondents revealed that factors such as whether an asset dilutes or enhances earnings per share and how it performs against financial benchmarks influence whether a particular business remains in a portfolio.
Ernst & Young has interviewed 600 corporate executives, with 49 of those coming from the UK. It also questioned clients, investment banks and law firms.
Some 32 per cent of UK corporations are in the process of, or are planning to, divest an in interest in the coming two yeas. Furthermore, 85 per cent plan to accelerate divestment plans.
More than half of companies selling assets, Ernst and Young says, are not ‘presenting divestments as attractively’ as possible, reducing the value of divestments.
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Michel Driessen, operational transaction services partner at Ernst & Young, comments, ‘The rationale for making divestments is shifting. Many UK companies are still using divestments as a short-term tool to raise cash or pay down debt.
‘However, some companies are now taking a more strategic and structured approach, viewing a divestment as strategically important as an acquisition.’
Driessen adds that fewer than 50 per cent are carrying out ‘all the key steps’ required to enhance the value of divestments such as validating the market, product and growth story with an independent review and developing an M&A plan for potential investors.
‘Corporate sellers benefit by enhancing the value story of their divestments and tailoring them to the full range of potential acquirers,’ he reveals.
‘Today, buyers are more astute than ever, so sellers need to present their case in the most appealing way possible.’