The volume of acquisitions has been outpacing divestitures in recent years. Prior to 2017, S&P 500 companies divested two businesses for every seven they acquired, according to PwC analysis of Capital IQ data. From 2017 to 2021, they divested two businesses for every nine acquired, a better-than-10% decrease in divestiture frequency than the prior five-year average.
Strategic leaders recognize that divestitures can be an important source of value creation. A disciplined, strategic approach to divestitures can drive overall returns, even in a challenging environment.
We looked at divestitures over the past decade and found that the median company saw a 3.8% increase in its stock price above its peers around the announcement date, according to PwC analysis of Capital IQ data. The top quartile received a 10.4% stock price boost, and companies that had a positive impact at announcement sustained a 3.1% excess return above their industry peers.
A divestiture can eliminate management distractions from strategic imperatives. It can also be an important source of capital for acquisitions or transformative business initiatives — a key consideration with current financing costs and the capital discipline to deliver required returns.
Strategic portfolio reviews can help make divestiture decisions more objective and clear away emotional barriers and inertial factors. The discipline of persistently reviewing portfolios can improve outcomes and reduce the stigma often associated with them.
Timely divestiture decisions can improve performance in the current business environment. Evidence suggests that proactivity can increase the odds for delivering a positive return by five times. That means setting aside emotions, making objective assessments and then acting quickly.
PwC’s portfolio review and divestitures study demonstrates that moving faster and decisively on divestitures can create more value for shareholders.
Companies that have strategic discipline and conviction will be able to find and execute good deals that create shareholder value.
High performing companies conduct regular portfolio reviews to assess which business units are strategic and which are no longer a fit for the core strategy. This creates opportunities to divest and redeploy capital into transformative opportunities that create value through new technology, talent and ESG capabilities. It also allows management to shift focus in the direction dictated by corporate strategy.
This may create an opportunity for strategic buyers to acquire earlier-stage companies. Acquirers with capital will likely have opportunities to do deals from a position of strength while factoring the rising cost of capital into dealmaking.
Markets will not be patient. C-suite leaders should seek out transformative deals that can help their company leapfrog forward and quickly generate value for shareholders. Despite some headwinds, we believe there will be opportunities for savvy dealmakers in 2023 and beyond.