Majority of Divestments Lose Value, Report Finds

More than half of divestments have lost shareholder value since 2010, according to new research released by Willis Towers Watson and London’s Cass Business School.

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.”

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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.”

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Tags: Divestment, MSCI World Index, Willis Towers Watson

Global economic growth is slowing more than expected, according to the most recent interim economic outlook from the Organization for Economic Co-operation and Development (OECD). Since its last report four months ago, the OECD has revised growth downward in almost all G20 economies, with forecasts for the euro area and Canada receiving the biggest reductions.

“The global expansion continues to lose momentum, amid heightened policy uncertainty, persistent trade tensions, and ongoing declines in business and consumer confidence,” said the report. “Global growth slowed more quickly than anticipated in the latter half of 2018 … in part reflecting the deep recessions occurring in some emerging-market economies and widespread weakness in industrial sectors.”

The OECD now forecasts worldwide real GDP growth will be 3.3% and 3.4% in 2019 and 2020, respectively, down from the 3.5% it had projected for both years in its November economic outlook. The group sharply lowered its forecast for the euro area to 1.0% and 1.2% in 2019 and 2020 from the 1.8% and 1.6% growth it had expected for those years in the previous report.

“Overall, recent economic and financial developments, and the materialization of some downside risks, suggest that global growth prospects have eased since the November Economic Outlook, especially in Europe,” said the report.

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Within the euro area, Germany and Italy received the most significant downward revisions. German GDP growth is now projected to be 0.7% and 1.1% in 2019 and 2020, compared to the previous forecast of 1.6% and 1.4%, while Italy’s economy is now expected to contract 0.2% in 2019 and grow 0.5% in 2020 compared to November’s forecast of 0.9% growth for both years.

“In Europe, trade growth has stalled, reflecting a slowdown in both external and internal demand,” said the report, which added that one-time factors have contributed to weakness in the region, such as the disruption to the car sector following new vehicle-emission tests.

The report also said that confidence indicators have “slowed markedly” in the euro area and the UK, as well as in China, “where concerns linger about the extent of the slowdown.”

However, because new policy measures offset weak trade developments in China, the OECD’s forecasts for the country didn’t change much, as it only lowered its 2019 forecast to 6.2% from 6.3%, and left its forecast of 6.0% growth in 2020 unchanged.

The report also said that growth is projected to remain weak in the UK, where the forecast was cut to 0.8% and 0.9% in 2019 and 2020 from November’s forecast of 1.4% and 1.1%, respectively.

“Persisting uncertainty about Brexit and the ongoing growth slowdown in the euro area are weighing on business confidence, investment, and export prospects,” said the OECD, whose current projections are based on a smooth Brexit. “If the United Kingdom and the European Union were to separate without an agreement, the outlook would be significantly weaker.”

Outside of Europe, Canada received the biggest growth forecast reduction for 2019, which is now expected to be 1.5% down from 2.2% as lower oil prices and production cutbacks have hit energy sector output, while higher mortgage rates have added to debt-service burdens for households. However, the OECD said Canada’s labor market conditions remain firm, and business investment should strengthen, and raised its 2020 forecast to 2.0% from 1.9%.

The GDP growth forecast for the US was lowered slightly to 2.6% from 2.7% in November’s outlook. For 2020, however, the outlook was raised from 2.1% in November’s outlook to 2.2%.

“Solid labor market outcomes and supportive financial conditions continue to underpin household incomes and spending,” said the report, “but higher tariffs have begun to add to business costs and prices, and the growth of business investment and exports has moderated.”

It also said that the partial Federal government shutdown is likely to slow growth in the first quarter of 2019, but that this effect will be reversed in the following quarters.

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Tags: Economy, global growth, Organisation for Economic Co-operation and Development (OCED)