2020 Global Divestiture Survey
Perspectives on sell-side activity and recent divestitures
After years of surging growth in the global mergers and acquisitions market, the COVID-19 pandemic is forcing downward spikes in both deal value and volume. But even in the thick of record lows, corporate divestitures can be a strong defensive tool for organizations looking to build portfolio resiliency heading into the next normal.
High ceilings, low floors
The end of the past decade marked a high point of optimism for mergers and acquisitions with global deal activity topping the US $3 trillion mark for the sixth consecutive year.1 Most sellers focused on divesting underperforming assets, refocusing portfolios on core growth areas, and increasing shareholder value through selective restructuring. Then the COVID-19 pandemic changed the game. As economies around the world were disrupted and corporations were confronted with a sudden and dramatic shift in their markets, global deal value declined by 71 percent in June 2020. The number of transactions decreased by about 8 percent year-over-year in most global markets. In April 2020, global M&A value had dropped to its lowest monthly value since August 2003.2
Now, corporate strategies have pivoted from responding to these changes toward efforts to recover and thrive in a different economy. Down cycles can present unique opportunities, and sell-side M&A can be an effective tool as companies look to reinvent themselves in these changed circumstances.
In markets where organic growth is weak and earnings growth is derived largely from corporate restructuring, divestitures offer an effective defensive M&A strategy to help preserve and enhance value.
The COVID-19 pandemic has not made the challenges of maximizing value from corporate divestitures easier. While many organizations are realizing anticipated value from recent divestitures, most sales processes continue to be costly and protracted, service agreements can pose an ongoing challenge post-transaction, and non-financial costs such as effects on morale, reputation, and customer perceptions can be considerable.
How can successful sellers continue to navigate these challenges and avoid common pitfalls in strategy and execution? In the beginning of 2020, Deloitte surveyed 100 global organizations with revenues greater than $500 million to understand their perspectives on sell-side activity and divestitures.
The survey responses reveal distinct perspectives on divestiture activity before a transition point. Even though disruption has been anticipated during an extended M&A boom, it arrived in a way no one could have expected with the spread of a global pandemic. After executing their initial response, companies are recalibrating in an effort to recover and thrive.
Corporate divestitures in the “next normal”
Even before the COVID-19 outbreak, a decade of unprecedented growth in many markets had already raised concern among many executives about a potential economic downturn. Sixty-six percent of respondents indicate these concerns had not changed their divestment strategy. For those that felt the need to adapt their plans, reevaluating their current portfolio to prepare for economically induced divestitures is most important.
Our M&A Trends 2020 Survey report found 75 percent of respondents expected to pursue divestitures in 2020—the second-highest level in the past four years. By February 2020, as the COVID-19 pandemic spread, this outlook quickly moderated. Only about half of respondents to this survey say their organizations are going to attempt new divestitures.
Many organizations may no longer have the luxury of choice. They may be forced to act. A Deloitte snap poll of 2,800 US companies in late April 2020 found executives will not only continue with M&A activity, but in some cases even accelerate their plans. This sentiment was echoed in our second-quarter survey, “The Deal in Focus 2020,” which found many M&A leaders were preparing for or considering a divestiture.
Activist investors are often one of the biggest reasons executives cite for recent divestitures, even though only 19 percent of our respondents indicate they had been subject to shareholder activism in the past two years. Given the impact of the COVID-19 crisis, this is likely to accelerate as organizations plan to start returning to normal.
What course of action should sellers consider as the economy begins to adjust to a new normal defined by a pandemic? Depending on the severity of the crisis’s financial impact, divesting non-core assets will be key to preserving and enhancing value in a defensive M&A playbook. Changes in the market and the competitive environment, as well as the need to raise additional funds, have become key reasons for recent divestitures. Organizations in dire straits, or those that can’t fix or sell an asset, should explore whether a managed exit of distressed assets can protect the remaining value. Sell-side activity is critical to build this type of advantaged portfolio. This includes being able to quickly identify assets that will be non-core in specific economic scenarios, as well as being prepared to execute at the right time. In the end, organizations may realize that the amount of investment required to grow a business and achieve market share would be too much for them, and that the asset could thrive better under different ownership.
A look ahead
This year’s Global Divestiture Survey captures distinct perspectives on recent divestiture activity before a transition point. A market disruption has materialized, and even though it has been long anticipated during an extended M&A boom, it has arrived in a way no one could have expected. After executing their initial response, companies are recalibrating in an effort to recover and thrive. Corporate divestiture will undoubtedly play a critical role in defensive M&A response strategies and in building resilient portfolios for the “next normal.”
“Divestiture activities will have a strong influence in reshaping businesses for the ‘next normal’ conditions,” said Iain Macmillan, Deloitte’s global M&A leader. “It’s also inevitable that dealmaking will need to change to reflect these new realities. Especially now, corporate purpose that intertwines sustainability with commercial success, resilience, and building trust across a wide coalition of stakeholders will need to be the cornerstone for future successful dealmaking.”
1 Deloitte analysis based on Refinitiv data
2 Deloitte analysis based on Refinitiv data (as of June 2020, not adjusted for inflation)
3 Deloitte analysis based on data from Thomson
4 Data sourced from Pitchbook
5 Statista, “Volume of data/information created worldwide from 2010 to 2025” (2020)