KUCHING: Intentions to divest in Southeast Asia are at record levels, driven by ongoing pressure to evolve existing business models amid rapidly advancing technology.
These are the findings of the EY Global Corporate Divestment Study 2018, an annual survey of 1,000 corporate executives worldwide, including over 70 in Southeast Asia, conducted between October and December 2017.
The divestment appetite in Southeast Asia has more than doubled, with 88 per cent of companies planning a divestiture in the next two years – up from 26 per cent in 2017- with a business unit’s less competitive position in its marketplace being a key driver.
More than two-thirds (68 per cent) said that their decision to divest was directly influenced by the evolving technological landscape.
About half (51 per cent) of Southeast Asian companies said that the need to fund new technology investments will make them more likely to divest – using the proceeds to improve operating efficiency (79 per cent), and address changing customer needs (87 per cent) in their core businesses.
“The boards of many of the largest companies in Southeast Asia are carefully evaluating their choices in the face of ongoing disruption happening in their industry, leading to portfolio rationalization decisions and divestment of businesses with eroding competitive advantage,and using the proceeds to invest in emerging technology to future-proof remaining parts of the company,” Ernst & Young Solutions LLP’s partner in Transaction Advisory Services Abhay Bangi said.
More than two-third (68 per cent) of divestments are prompted by opportunistic, unsolicited bids, according to the survey.
The survey found that those that conduct portfolio reviews annually are twice as likely to exceed performance expectations for divesting “at the right time.”
Almost half (41 per cent) of companies in Southeast Asia assess their portfolios twice a year to determine the business units or brands to grow or divest.
Businesses are motivated to shed non-performing assets that they believe may have sat too long in their portfolios with close to half (47 per cent) of executives admitting they held these assets longer than they should have.
The survey also found that the use of analytics is strongly on the rise. Seventy percent of Southeast Asian respondents have used advanced analytics to understand the true value of a non-core asset in their last divestment.
Companies that consistently apply data-driven analytics to decision-making are 33 per cent more likely to exceed price expectations in their divestments.
“For companies that decide to divest, it is important that they plan early with the right level of senior management focus and consider the asset’s value attributes from a potential buyer’s perspective.
“They should also consider preparing tailored diligence materials to support the value proposition to buyer pools to maximize value on exit,” Ernst & Young partner and Malaysia Transaction Advisory Services leader George Koshy said.
Macroeconomic and geopolitical triggers are still driving divestment decisions in Southeast Asia.
The tax reforms offer a new opportunity to revamp corporate strategies, with 90 per cent highlighting tax policy changes as one of the most significant geopolitical shifts that may affect plans to divest.
However, more than half (57 per cent) of companies report that lack of preparation in dealing with tax risk caused value erosion in their last divestment.
“In the current environment, companies should consider using creative deal structures.
“Many conglomerates in Southeast Asia are contemplating spinning off business units to unlock value for their shareholders while retaining exposure to the asset.
“Partial divestments, joint ventures, revenue sharing and collaboration agreements could be other ways of doing this,” Bangi added.