Activists are back after a brief pandemic-induced hiatus, scoring some high-profile wins in sectors ranging from energy to chemicals to real estate. More than 120 campaigns were launched in the first quarter of 2021, up 117% from the previous quarter, according to Activist Insight. And according to the 2021 EY Global Corporate Divestment Study, 89% of activists note their campaigns will recommend carving out non-core or underperforming businesses. It may be time for companies to revamp their portfolio, before an activist does it for them.
But most companies are slow to divest: 78% of companies say they held on to assets too long when they should have divested them, and more than a third of companies (37%) say activist activity in their sector prompted a review of strategic alternatives in the past 12 months.
What activists want
Activist investors say they focus on the following when they look at target investments:
- Flexibility of the target company’s cost base
- Ability to adapt to different routes to market
- Overly complex divisional structures
- Board composition or lack of refresh
- Suboptimal allocation of growth capital
Strategic divestments can address some of these issues and serve as a funding source to address others, all while redirecting executive focus on areas of the business that provide a greater likelihood of delivering long-term stakeholder value.
Take action once it’s clear a business should be divested
Activists are demanding action. Two-thirds (67%) from the same study say they expect a divestment to be announced three to six months after they announce an investment in a company.
However, many companies hesitate, even when they know a business unit is no longer a part of the long-term strategy. But while a divestment decision may be more challenging when a business is still healthy, the business is usually far more marketable at this point. And even smaller businesses that do not require much capital investment can still be a management distraction.
CFOs can help overcome this hesitancy by showing how a divestment is an opportunity to refocus capital and realign RemainCo’s cost structure, removing bloat from the system that may have built up over the years, to increase shareholder returns.
CFOs may also consider other divestment alternatives such as:
- Staged or stepped exits: Selling a majority interest while maintaining a minority investment can provide the best of both worlds. It removes the business from the balance sheet and brings in new external capital that a non-core holding will not receive under a strategically determined capital allocation plan. At the same time, it provides continued exposure to the business’s upside through the retained stake.
- Asset-light approach: This involves transferring capabilities such as people, process and technology, to “better owners” to enable companies to transition fixed costs to a variable cost structure. Such a transfer can also enhance agility and facilitate a shift of resources that allows a focus on core capabilities.
- Joint ventures with strategic partners: This structure may be particularly attractive if the business is an important supplier to the parent company, as it can help maintain reliable access to key inputs.
No company is immune to activist investing. But an active divestment process clearly aligned to your company’s overall strategy can help address activist concerns before they consider your company a target.
Learn more about how EY teams can help you with strategic portfolio management.
The 2021 EY Global Corporate Divestment Study results are based on an online survey of 1,040 global corporate executives and 27 global activist investors, conducted between January and March 2021.
Rich Mills, EY Global and Americas Sell and Separate Leader, has been a leader of transformational divestitures for more than a decade, including carve-out sales, tax-free spins and Reverse Morris Trust (RMT) transactions. The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.