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If your organization acquired or merged with another organization in the past year, chances are it’s been a profitable venture thus far.
This is according to Willis Towers Watson’s Divestment Performance Monitor, in partnership with Cass Business School, which found that 53% of organizations that fall under the M&A umbrella have outperformed their industry benchmarks — based on share price performance — by an average of 1 percentage point (pp).
This marginal outperformance is in contrast to companies that divested parts of their business this year, 63% of which went on to significantly underperform their MSCI Index by an average of -7pp. While divestitures lose value across the board, the acquisition of a divested asset, as well as spin-offs, has an outperforming effect.
The study also shows that the size of divestments had an impact on performance for the divesting company. Companies divesting 0% to 5% of their total company value underperformed their market by an average of -0.8pp in the first half of 2019. This rose to -6.9pp for companies divesting 5% to 15% of their assets by value and -6.3pp for those divesting over 15%.
The longer-term trend for firms divesting parts of their business has been similarly challenging with performance over the past three years at -3.6pp and over the past decade at -2.8pp. The study also shows that the volume of divestments worth over $50 million in the first half of this year has declined to its lowest level in the past decade, with 251 transactions taking place in H1 2019 compared with an average half-year total of 314 over the past decade.
Spin-offs were the only deal type to successfully buck the negative trend for firms divesting parts of their business, with a positive performance of +1pp above the MSCI Index.
“Most companies are set up to buy assets, not sell them, which means decisions to sell are often made at the wrong time or in the wrong manner. Such mistakes are expensive,” said Duncan Smithson, senior director, mergers and acquisitions at Willis Towers Watson. “The superior track record of spin-offs, transactions that are complex and require considerable preparation to address the many moving parts and situations that can go wrong, sets the standard for companies aiming to overcome the odds and sell well. Defining the right deal, managing talent uncertainty and rooting out stranded costs can make the difference between a divestiture that succeeds and one that destroys value.”