The divestitures market is poised for a higher level of activity in the next twelve months, especially among corporate buyers, according to findings from a PricewaterhouseCoopers’ (PwC) Transaction Services survey on divestitures released today.
PwC surveyed 215 respondents in late August and September of this year, aiming to gauge the condition of the current mergers and acquisitions market as it pertains to divestitures. The survey, “Divestitures in Difficult Times,” indicates that 69 percent of respondents are anticipating either similar or increased levels of divestiture activity in the coming year compared with the last 12 months. The survey also found that 56 percent of respondents foresee domestic corporate buyers will be the primary players in 2010.
According to the findings, the forecasted boost in deal activity is linked to corporations’ continued desire to sell off non-core or non-performing businesses. PwC’s Transaction Services contends that this reflects an increasing emphasis by client companies on refocusing, restructuring and reorganizing their businesses, particularly in terms of analyzing the appropriateness of acquisitions made in the last 10 years.
“Survey respondents are noticeably upbeat about divestitures, which reflects the uptick in deals we’ve seen in the third quarter of 2009, and a renewed sense of an economic recovery,” said Bryan McLaughlin, partner with PricewaterhouseCoopers’ Transaction Services. “The anticipated return of corporate buyers is in line with the premise that companies are acquiring businesses in order to strengthen their positions by filling a gap in their business models.”
Sixty percent called the current conditions “clearly a buyer’s market,” with responses from public and private companies in equal agreement. The challenging economy and its related uncertainties were the leading reasons for characterizing the current environment as a buyer’s market (40 percent), followed by lack of credit to complete deals (26 percent) and the valuation expectation gap between buyers and sellers (20 percent). Yet, 30 percent of all respondents said that while the market has been dominated by buyers since the credit crisis, that dominance is starting to weaken.
Deals Getting More Complex
At the same time, the survey results show that the divestiture process is growing more complex, creating strong headwinds for potential sellers. Of the respondents who have completed transactions in the past 12 months, 72 percent said the divestiture process has taken longer to complete. Of those, 51 percent said they had taken at least 20 percent longer to conclude and an additional 21 percent said completions had taken at least 10-20 percent longer than in prior years.
Buyer requirements for more due diligence information were the primary reason cited by 75 percent of the respondents for the prolonged timeframe. Forty-three percent of respondents reported that potential buyers are asking for some additional information and access, and an additional 32 percent said buyers were requiring extensive additional information. As a result, PwC’s Transaction Services contends that managing the process has never been more important to sellers than it is today.
“When you combine a buyer’s market with limited financing to complete transactions, it is natural that the process would require more time,” said Mark Ross, partner with PricewaterhouseCoopers’ Transaction Services. “In this type of environment, you also have buyers who are suspicious that a divestiture may just be a simple way for companies to rid themselves of a problematic asset, which adds additional pressure on the process. Sellers need to invest the necessary time and effort in the diligence process and provide credible financial information to ease concerns, and understand that the macro market conditions have changed from those existing for most of this decade.”
Other survey results confirming the complexity of the divestiture process include:
When those who reported divestiture activity in the past 12 months were asked to rate the importance of having audited financial statements available for a divestiture target, 49 percent said it had become more important now than in previous markets and 27 percent referred to it as “critical.”
In general, companies appear to struggle with the divestiture process. When asked to compare their organizations’ acquisition and divestiture processes, 46 percent of all participants said their acquisitions process was better-defined. In addition, 39 percent said they had no formal pre-divestiture review process that was performed consistently. Considering the challenging market conditions, the survey results suggest that companies may better achieve their goals by improving their divestiture review processes.
When asked to identify the most complex part of a divestiture, especially a carve-out, 25 percent of all survey participants selected finding a buyer, followed by executing the separation of the business (23 percent), and producing carve-out financial statements and re-casting historical results (21 percent).
“The survey showed that corporate divestiture processes are often not as well designed as are those for acquisitions,” added Ross. “Divestitures often place additional stress on a company and distract management from its primary responsibility: running the business.”
More than 60 percent of respondents said divestiture activity had dropped off or been deferred in the last 12 months, suggesting a pent-up need to divest when conditions improve, which could lead to an increase in divestitures over the coming year. The highest level of all respondents (35 percent) said they had delayed or deferred divestitures this year because of economic conditions. Twenty-six percent of all survey participants reported reduced divestiture activity while, 21 percent reported no change in divestiture activity.
The trends by type of respondent were somewhat different. Of those who reported there had been a delay or deferral of activity due to economic conditions, 36 percent of all private company responses fell into this category as opposed to 25 percent of all public company responses, suggesting that private companies were more affected.
Valuations Gap Slowing Deals
Valuations remain a moving target and a significant factor contributing to the stagnant M&A market, according to respondents. Ninety percent of those surveyed placed the value expectation gap between buyers and sellers in 2009 at between zero and four turns of EBITDA. Interestingly, half of the respondents (50 percent) identified corporate domestic buyers as the predicted source of higher valuations in the coming year.
In analyzing the value gap responses further, public and private company respondents generally agreed on the extent of the expectation gap, with 40 percent of all those representing public companies and 44 percent of those from private firms placing it between zero and two turns of EBITDA. In the two-to-four-turns category, 49 percent of all public company responses and 45 percent of those from private companies held this view.
“Certainly, the divestiture market will be subdued in the coming months, but the new year shows promise for growth,” concluded Ross. “As organizations develop plans for the expected upswing in the economy, strategic buyers will enter the market in greater numbers. The re-emergence of strategic buyers and sellers will stabilize valuations, although with a gap between the two for the foreseeable future”
For more information on PricewaterhouseCoopers’ Transaction Services’ Divestitures Survey, visit www.pwc.com/us/divestituresurvey.