strategic divestment

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2/2/13 Strategic Divestment Activity Expected to Increase in Next Two Years Due to Slow Economic Recovery - Ernst & Young - United States

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Strategic Divestment Activity Expected to Increase in Next TwoYears Due to Slow Economic Recovery

77% of companies to accelerate divestment plans 46% plan to divest within twoyears

In the last two years, short-term "fast cash was a priority for sellers

73% of companies that divest leave money on the buyers table

New York, 16 January 2013 - According to a new survey from Ernst & Young, companies are

increasingly refocusing on divestitures with more than three-quarters of respondents saying that theyintend to accelerate their divestment strategy over the next two years. This is a marked change from thepast two years, when nearly 50% of divestments were driven by a need for a quick cash injection ratherthan a longer-term strategic objective.

The 2012 Global Corporate Divestment Surveyreveals that respondents rationale for a divestment isoften focused on short-term financial motives rather than the longer term strategic benefit for thebusiness.

Six out of ten respondents say the main factor that determines whether a business stays within acompany portfolio or not is short-term financial measures, for example, whether an asset d ilutes orenhances earnings per share (EPS), and how it performs against financial benchmarks such as returnon capital employed (ROCE). Strategic drivers such as enhancing shareholder value or focusing oncore business, come further down the priority list.

The survey, conducted by the Economist Intelligence Unit (EIU), is based on feedback from 600 seniorcorporate executives globally, as well as a series of interviews with clients, investment banks and lawfirms.

In the past few years many companies have looked to divestments to off-set cash and credit difficultiesand to drive shareholder value as the sum of the parts are greater than the whole, says Paul Hammes,Ernst & Young LLPs Americas Leader for Divestiture Advisory Services. This short-term thinking isshifting however as companies plan for the long-term and take a more strategic approach todivestitures.

Companies that divest strategically tend to exceed their value goals. According to the survey, 73% ofcompanies that divest leave money on the buyers table further highlighting the benefits of a morestrategic approach. In this prolonged period of low or even zero growth, divestments will likely play amore important role in how companies navigate uncertainty, meet their strategic corporate objectivesand create value for their stakeholders.

Are businesses telling the full value story?Fewer than 50% of businesses say that they are carrying out all of the key steps required to enhance

the value story of their divestments. Forty-six percent of global corporations are in the process of or areplanning to divest in the next two years. However, more than half of those selling assets are notpresenting their divestments as attractively as they could to the broadest range of potential buyers. As aresult they are not maximizing the value of their divestments.

Contacts

Jennifer ComptonErnst & Young LLP917-903-7506

Hannah JamesFleishman-Hillard212-453-2104

Maximizing divestmentsuccess

Our study of 567 globalexecutives reveals five leadingpractices that can helpcompanies avoid leaving value

on the table. Learn more .

Human capital carve-outstudy: strategies for success

In our latest study, we highlighttrends and leading practicesthat can help companies usedivestments to raise, optimizeand preserve capital. Learn

more.

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Essential steps such as validating the market/product/growth story with independent review (50%respondents), developing an M&A plan for potential investors (45%) and providing their own view ofsynergy opportunities in the information provided to buyers (43%) are being carried out by a minority ofthose businesses divesting.

In todays market buyers are savvier than ever, so corporate sellers need to view themselves as thebuyer would in order to present the most compelling case for the deal. It is crucial that sellers enhancethe value story of their divestments and tailor them to the full range of potential acquirers, continuesHammes.

More than half of respondents said they would ramp up their divestment activities if economic growthimproved, but there are differences between regions: 65% of respondents from Asia-Pacific say thatthey would increase their divestment activity but are holding back due to economic conditions, comparedwith 60% from the Americas and 51% from the EMEA region.

Overall, many companies have chosen to prioritize operational improvements, cutting costs andincreasing efficiency over pursuing divestments in recent years, waiting for the economy to recover.However, the regional disparities may indicate that Western developed market companies have becomebetter accustomed to macro-economic growth challenges having managed uncertainty for longer and are now more willing to divest despite the economic environment.

Many companies have been taking a wait and see approach to deal-making in the last few years aseconomic uncertainty persists, and this approach may be here for a while as a prolonged weakeconomic outlook continues. However, according to our research, many companies may be missing outon growth and value opportunities by postponing divestment plans, says Hammes.

Supporting this view, 40% of companies said a high degree of competition in the M&A process helpeddrive up values.

Rigorous portfolio management and a broader buyer base maximize successWhen asked about their most recent divestments, only a fifth of companies overall exceeded theirexpectations. Respondents with structured processes were more likely to have achieved strategicgoals: 55% divested ahead of time and exceeded price expectations. Of those divesting withoutstructured processes, only 34% met those expectations.

Sellers are also not always considering the full range of potential acquirers for their assets. Only a thirdof potential sellers consider overseas buyers in the same sector while just a fifth look to domesticbuyers in a different sector. Only 13% consider an overseas buyer in a different sector to be the mostlikely acquirer.

Corporate sellers could also benefit by looking beyond corporate buyers for instance, only 3%consider private equity a likely acquirer.

Companies looking to divest may increase value by appealing to buyers in a range of sectors and

markets around world, including private equity, says Hammes.

Employee engagement ensures long-term divestment viabilityThe most successful divestitures are those that focus on employee engagement and retention,according to Ernst & Youngs Human Capital Carveout Study, which surveyed more than 100executives experienced in global corporate divestitures to determine how their human capital initiativesimpact their deal success. The report found that 85% of survey respondents say that employeeretention is the biggest driver of carve-out success.

Before the deal is signed corporate buyers and sellers must consider the long-term value of the dealfrom a people perspective as well and our research and experience has found that those companiesthat focus on employee communication and retention are the most likely to translate to long-term value,continues Hammes.

The sold standard: golden rules for any saleThe Global Corporate Divestment Surveyhighlights principles and practices that will help ensure asuccessful divestment.

Hammes concludes: Those companies that focus on consistent and strategic practices including:widening the net, standing in the buyers shoes and having a long-term value perspective will be mostlikely to achieve divestment success.

Notes to EditorsErnst & Youngs 2012 Global Corporate Divestment Study reveals five leading practices that sellersshould focus on to maximize divestment success:

Conduct structured and regular portfolio management: The respondents that havestructured processes are more likely to have achieved strategic goals:

Consider the full range of potential buyers:Appealing to a full range of buyers , includingstrategic and financial, domestic and overseas, can create strong interest for an asset andrealize a price that exceeds expectations.

Articulate a compelling value and growth story for each buyer: Buyers are morecircumspect about the growth potential of businesses being offered for sale. Few sellersarticulate a strong value and growth story from the perspective of the most likely buyers oftheir businesses.


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Prepare rigorously for the divestment process: Select changes to the preparationprocess could have made a material difference to value. Examples include protocols forinformation sharing and confidentiality, engagement with target management and investmentby senior team members.

Understand the importance of separation planning:A clear separation roadmap isidentified by more than half of respondents as the most increasingly complex aspect ofdivestment. Other challenging areas include negotiating transition services agreements(TSAs), estimating standalone costs, tax planning and decisions regarding the completionmechanism. Buyers that do not fully understand these factors perceive greater risk, which isoften reflected in their offering price.

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our167,000 people are united by our shared values and an unwavering commitment to quality. We make adifference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each ofwhich is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, doesnot provide services to clients. For more information about our organization, please visit www.ey.com.

This news release has been issued by EYGM Limited, a member of the global Ernst & Youngorganization that also does not provide any services to clients.

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