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 H1 2019 (–7.0 pp) and H2 2019 (–5.9 pp), and 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 with the previous six months (315).
Another unforeseen outcome was an anticipated surge in private equity (PE) buyer activity, which has so far failed to materialize, 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.
“Deal making plunged in the second quarter of 2020, as COVID-19 sent the M&A business into a deep freeze after a decade-long boom,” said Duncan Smithson, senior director, M&A, Willis Towers Watson. “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 look at companies selling portions of a parent company to both listed companies and private equity buyers, include:
All regions but Europe underperformed: North America divestitures performed worst of all regions (–23.5 pp) in H1 2020, followed by Asia Pacific (–17.1 pp). In contrast, European divestitures managed to outperform their industry benchmark by an average of +4.7 pp, boosted by a positive performance of +4.9 pp from U.K. deals, which account for roughly one-quarter of all European divestitures.
Megadeal activity on par with 2019: Six deals closed in H1 2020 compared with five deals in H2 2019. The performance of these megadeals dipped sharply, currently at –22.4 pp compared with +6.1 pp for the last six months of 2019.
Buyers unable to buck downward trend: Buying divested assets was the only M&A strategy in 2019 to create shareholder value; however, acquirers (–15.7 pp) are now performing worse than sellers (–11.3 pp), suggesting both parties would have been better off sitting out the market turbulence in the first half of 2020.
Selling to PE buyers: The trend for seller performance to be worse when dealing with PE buyers (–14.6 pp) compared with corporate buyers (–9.5 pp) continued in H1 2020. PE acquirers tend to have professional transaction teams with deeper experience and more regular deal flow, enabling them to negotiate harder. To optimize value and ensure buyers do not win at their expense, sellers will benefit from thorough planning and preparation for sale.
Although the data show that just over six out of 10 deals (63%) from H1 2020 underperformed, this also means that the remaining deals were successful in outperforming rival companies that did not divest.
“Current trends driving divestment activity may accelerate, and many organizations will soon find themselves without the luxury of choice,” said Smithson. “There is clear evidence that down cycles can present unique opportunities and sell-side M&A can be an effective tool. The most resilient and successful companies will be ones that can quickly reidentify noncore assets, are prepared to execute, show discipline and focus on portfolio transformation.”