With divestitures on the rise, negotiators are adjusting to a new reality


When I spoke this week to John potter, who runs American affairs at PwC, he felt a little harassed. I could understand why. It had been a busy day – the last busy day of a very, very busy year for anyone working in the business of buying and selling businesses.

“I mean, I try to avoid hyperbolic statements from extremes,” Potter told me. “But from a M&A cycle perspective, there’s no question that we’re in a different era than we’ve seen before. “

Transaction volumes are exploding. Transaction values ​​are skyrocketing. Stock prices continue to climb. And shareholders everywhere are eager to see high returns.

For many large companies, there is a clear side effect: Nowadays, there could be more pressure on conglomerates than ever to divest themselves of non-essential divisions. In an environment where easy capital seems to be everywhere and activist investors are looming over all walks of life, many companies are deciding that the best way to maximize the value of a business unit is to sell it to someone else. .

“Public markets continued to rise,” says Keith campbell, who leads the consulting firm’s carveout team Monroe West. “So there is constant pressure to outperform. ”

Globally, we’ve recorded nearly $ 1.36 trillion in business divestitures so far in 2021, according to Refinitv, the highest total in the past decade and a 35% increase from Last year. The wave of splits made headlines last month, when General Electric, Johnson & johnson and Toshiba all have announced their intention to split into several small businesses.

In some ways, this is all a symptom of innovation and competition. In today’s crowded landscape, it’s harder than ever to dominate a market. And with so many shareholders clamoring for every last dollar in potential profits, nothing less than dominance will suffice.

Which means GE, J&J, and Toshiba probably won’t be the last sprawling entities to decide that bigger isn’t necessarily better.

“With all of the new players being created in so many different markets, and the Amazons out there, you really have to keep changing and reinventing yourself,” Campbell said. “And you can only do that for so many basic operational activities. That’s kind of why we think conglomerates, cross-sector conglomerates, are kind of a thing of the past. ”

PwC’s Potter laid out some of the logic behind this trend. When a business has a handful of different divisions under one entity, it is inevitable that some will take precedence over others. GE, J&J and Toshiba now seem to recognize the long-standing argument from activist shareholders that, for the divisions at the bottom of these totem poles, the best way forward may be to go it alone.

In a more gloomy market, J & J’s breast security might have more appeal. But the past 18 months or so have been an optimal environment for public companies. And investors in these companies expect peak performance.

“A lot of times people look at five companies within one company and say those five things alone are worth more than that company as a whole,” Potter said. “And how do you unlock that value that gets removed when we put the five things together?” I think that’s where a lot of the activity we see today is really focused.

GE, J&J and Toshiba are planning to separate into a series of stand-alone private companies, which makes sense given their enormity. For companies looking to create smaller units, a sale to private equity funds is another option. Some companies, like One Rock Capital Partners, specialize in this type of transaction, which has inherent complications.

“In general, exclusions are riskier [for private equity] than a traditional investment in a new platform, ”Campbell said. “Because you have to go through the transition and put in new management, you put in place new processes, new systems, and there are just a lot of changes going on. ”

With this added risk, however, can also come an additional reward.

“If you’re comfortable with the equity you’re putting in there and the investment required, and you can subscribe to the one-time investment, and you can find a new CEO or management team who can running the business, the feedback is great, ”he said.

In the end, it all comes down to the returns. Every business needs a financial injection to create a financial exit. Exclusions, splits and other deals will continue as long as private equity firms and other strategic buyers feel they have the ability to tip this equation in their favor.

“People think of divestitures like, oh, you’re selling non-core assets, you’re selling underperforming businesses,” Potter said. “Why would you buy something that is underperforming? No, you buy something because you believe in its performance, and you are going to invest in it, give it the investment and the attention it needs to thrive.

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