Dealmaking + boards: Portfolio renewal to create value

  • Blog
  • 4 Minute Read
  • October 16, 2023

Michael Niland

US Divestitures Services Leader, PwC US

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Maria Castañón Moats

Leader, Governance Insights Center, PwC US

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According to a recent PwC survey, 40% of CEOs think their company will no longer be economically viable a decade from now if it continues on its current path. Many companies may need to transform their business in order to survive. Doing so efficiently requires understanding each business segment’s strategic fit and where value is generated — or potentially lost. An ongoing portfolio strategy review process can help management teams determine if they are an effective owner of a business and identify elements that may be a drag to shareholder returns. Portfolio reviews may also reveal areas where investment could drive additional upside.

Dealmaking is often a key output of the portfolio renewal process. A cohesive divestiture and reinvestment strategy can provide a faster route to achieving portfolio and operational goals than organic growth alone. It can help address key transformation imperatives such as diversifying supply chains, addressing sustainability concerns or scaling with new tech like generative AI (GenAI). The lack of a clear reinvestment plan, however, can inhibit companies from deciding to divest. Absent a reasonable alternative, executives can often be more prone to status quo bias and trying to fix a business that is not a strategic fit instead of divesting it. According to a recent PwC study of divestitures, 57% of the 2,500+ executive respondents who tried to fix a business unit said the unit’s value deteriorated or stagnated.

The early and continued involvement of boards can help articulate these plans. Most respondents told us their board is involved with the portfolio strategy review process at least annually, but the frequency of involvement ranged widely from ad hoc to annually. For companies with boards that participate in the process several times per year, the likelihood that those companies can optimize their portfolios for value through divestitures is three-and-a-half times greater than those with boards that participate once per year or less. Divestitures are an underused lever for value creation, although divestitures have proven to generate greater total shareholder return. For companies that announced a divestiture over the past decade, for instance, the median increase in stock price around the date of announcement was 3.8% compared to their industry index. The top 25% of these companies achieved double-digit stock price increases (above 10.4%) compared to their industry index.

Board involvement also helps accelerate the deal process. When boards are involved in portfolio review more than once per year, the probability that a decision to divest a business will take fewer than six months increases 21%. Our research shows that acting with speed increases the likelihood of a positive total shareholder return.

The key message is that boards need to be engaged. The degree of board involvement in the strategic portfolio review process has a significant positive impact on the likelihood that companies will make portfolio decisions key to the transformation process and the speed at which they accomplish these goals. Both of these are crucial to increasing the chances for value creation.

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