Following a dramatic nosedive in performance in the first half of 2020, companies look set to recalibrate their strategies in order to recover and thrive in a post-crisis world.
AMSTELVEEN, 9 September 2020 – The value of divestment deals plunged to record lows in the first six months of 2020, according to Willis Towers Watson’s Divestment Performance Monitor (DPM), in partnership with the Business School (formerly Cass). As the COVID-19 pandemic changed the game, with corporations confronted by a sudden and dramatic shift in their markets, 63% that sold portions of their business in the first half of 2020 underperformed.
Companies actively engaged in divestment deals in the first half of 2020 underperformed the Global Index1 by an average of 11.3 percentage points (pp). This is an even sharper decline than the negative performances in H1 2019 (-7.0 pp) and H2 2019 (-5.9 pp) and is the poorest performing six-month period since the divestments database launched in 2010.
While the negative performance is significant, it is not unexpected considering the severity and volatility of the markets in the first half of 2020. Given the defensive role that divestitures can play in distressed circumstances, the absence of a bigger spike in deal volume is perhaps more surprising. With 292 deals completed in the first half of 2020, overall numbers are down globally compared to the previous six months (315).
Another unforeseen outcome was an anticipated surge in Private Equity (PE) buyer activity which has so far failed to materialise, despite the PE industry holding record levels of capital. Instead, PE buyers accounted for just 22% of all divestments in H1 2020, a market share on par with the same period last year.
Gabe Langerak, Head of M&A for Western Europe at Willis Towers Watson, said: “Dealmaking plunged in the second quarter of 2020, as COVID-19 sent the M&A business into a deep freeze after a decade-long boom. Volumes in the third quarter will most likely remain stuck in low gear, being tied to deal activity occurring just after the full impact of the pandemic struck. A marked increase in completed deals is then anticipated for the final quarter of 2020.
“Companies face unprecedented challenges as a result of the crisis’ financial impact, forcing many into survival mode. Depending on the severity of the fallout from COVID-19, divesting non-core assets will be key to preserving and enhancing value for many companies, as they reshape their portfolios to recover and thrive in a post-crisis world.” Insights from the DPM data, which looks at companies selling portions of a parent company to both listed companies and private equity buyers, include:
Although the data shows that just over six out of ten deals (63%) from H1 2020 underperformed, this also means that the remaining deals were successful in outperforming rival companies that did not divest.
“We do not know exactly what lies beyond the COVID-19 crisis, but current trends driving divestment activity now may accelerate, and many organisations will soon find themselves without the luxury of choice,” said Gabe Langerak. “There is clear evidence that down-cycles can present unique opportunities and sell-side M&A can be an effective tool as companies enter the recovery stage of COVID-19. The most resilient and successful companies will be those which are able to quickly re-identify non-core assets, which are prepared to execute at the right time, which show discipline and which focus on portfolio transformation.”
Willis Towers Watson’s M&A practice combines our expertise in risk and human capital to offer a full range of M&A services and solutions covering all stages of the M&A process. We have particular expertise in the areas of planning, due diligence, risk transfer and post transaction integration, areas that define the success of any transaction.
1 The global database analyses the share price performance of companies selling assets, from six months prior to the divestment announcement to up to six months after the divestment has completed.
