The Willis Towers Watson’s Divestment Performance Monitor (DPM) looked at companies selling portions of a parent company to both listed companies and private equity buyers, and analyzed the share price performance from six months before the divestment announcement to up to six months after the divestment was completed.
According to the data, there were more than 5,500 divestment deals completed worldwide from 2010 to 2018 worth over $50 million each, with a combined value of $3.9 trillion. Of these deals, 54% underperformed market indices as measured by the study, while the remaining 46% outperformed.
Divestitures offer “real potential to achieve higher profitability from better capital allocation, improved focus on core activities, and more funds to invest in and support growth,” Willis Towers Watson’s Jana Mercereau said in a release. “Yet our data shows sellers continuing to struggle to create shareholder value from deals, as investors punish companies whose strategies and execution they disapprove of.”
The research also showed that based on share price performance, companies actively engaged in divestment deals underperformed the MSCI World Index by an average of 2.1 percentage points. And at the same time, the buyers of those divested assets saw their deals outperform the market by 3.1 percentage points.
The difficulty of achieving value from divestments affected all geographic regions, according to the report. Since 2010, Asia Pacific divestitures have shown the worst performance among all regions, with an average underperformance of 2.8 percentage points, followed by North American divestitures, which underperformed their non-divesting rivals by 2.1 percentage points, and European divestitures, which underperformed by 1.2 percentage points.
However, not all divestments struggled. Many of the better-performing divestments have been spin-offs, according to the report. This was at least partially attributed to the fact that spin-offs are often done with a successful business in a move to take advantage of its value separately from the parent company. According to the data, spinoffs outperformed the MSCI World Index by a wide margin—18.2 percentage points—since 2010.
Mercereau said that in difficult market conditions, the amount a company can gain or lose depends heavily on taking a more thoughtful approach.
“Investing the right resources to perform sell-side due diligence, preparing the business for sale, and constructing a clear articulation of the rationale before a sale is critical to attracting better suitors,” said Mercereau. “Buyers will make stronger offers for a deal they can see will create more value and will be less able to negotiate against a seller where detailed preparation has been completed.”