Once upon a time in corporate America, prevailing wisdom held that management should buy and hold as many assets as possible, regardless of whether these businesses had anything in common with one another. Thus, conglomerates such as GE — which makes lightbulbs, dishwashers, power systems and programs for NBC — were born.
Now that process is starting to spin in reverse. Companies are selling off assets at a greater rate, as the ideals of clarity and focus supplant the once dominant ideal of company-as-portfolio. During the last month, five constituents of the S&P 500 have announced plans to sell off asset, according to S&P Senior Index Analyst Howard Silverblatt. They include ITT, Marathon Oil, Williams Companies, Sara Lee, and Marriott. Even GE is tightening its focus: It sold a controlling interest in NBC to cable giant Comcast.
The wave of asset sales began a number of years ago, and slowed as the financial crisis upset the market by depressing asset prices and making financing for acquisitions all but impossible to obtain.
Now that the economic recovery appears to be gaining strength — and the capital markets are open for business — the wave of corporate asset sales appears to be building once again, according to new research by PricewaterhouseCoopers. Divestitures declined 9 percent last year, compared with 2009, PwC says. But 69 percent of professionals surveyed said they expected divestitures to stay the same or increase during the coming 12 months.
Over the last year, divestitures have run counter cyclical to a recovering M&A market, according to PwC. The number of M&A deals increased from fewer than 8,000 in 2009 to just over 8,000 in 2010. Yet divestitures as a percentage of overall M&A declined slightly from about 8 percent to about 7 percent. A buyers market convinced many would-be sellers to sit on the sidelines.
Yet there were signs of a turnaround even last year, when the average value of disclosed divestitures increased 19 percent in 2010, thanks in part to a rising stock market and recovering economy.
As the year progresses, more divestitures are likely, especially in sectors such as energy, technology and financial services, which have led the market in the past. And while the S&P 500 divestitures have grabbed the most attention, much of the activity is likely to be concentrated in the middle market.
While the acquisitions market gets lots of attention in the media and among analysts and investors, divestitures are often given short shrift — even by companies that are selling their own assets, PwC found. “We see companies applying much more preparation to acquisitions than they do to divestitures, even though the value proposition is very similar,” says Mark Ross, a partner with PwC Transaction Services.
Spinning off an asset may help a company improve its focus. But sellers don’t always extract the full potential value of such a transaction. Sellers often fail to adequately prepare a business for sale, which depresses the value of a deal, should it occur.
“If you were selling a house, and you knew you could add $50,000 or $100,000 of value just by adding some paint, or catching up on deferred maintenance, you absolutely would do it. Yet we see sellers of corporate assets not taking such simple steps to maximize value,” says Bryan McLaughlin, a PwC Transaction Services partner. “Why are they avoiding these steps? Largely, if people own an asset they think they know understand it fully and that is not always the case. Additionally, people tend to run from divestitures rather than associate with them, which further distracts from effective preparation and value creation,” McLaughlin says.
