Wednesday 21 August 2019 12:01 am

Companies that buy divested assets more likely to outperform index

Companies that bought carved-out portions of other businesses were more likely to outperform their industry average, a study has found.  

Over half (53 per cent) of companies that bought divested assets during the first half of the year outperformed their MSCI Global index by an average of one percentage point, according to research published today by Willis Towers Watson. 

Those who sold off portions of their business to either a listed company or a private equity struggled to add value, however, with 63 per cent going on to underperform their industry benchmarks by an average of seven percentage points. 

Spin offs were the only deal type to buck this downwards trend, leading to an average performance increase one percentage point above the index. 

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Large divestments declined to their lowest level in ten years, with 251 divestments worth over $50m (£41m) taking place in the first half of 2019 – a 20 per cent drop on the half-year average for the past decade. 

The size of the divestment made by companies had an impact on its subsequent performance, the report found.

Companies that divested between zero and five per cent of their total value were found to have underperformed by an average of 0.8 percentage points, but this rose to an average of 6.9 percentage points for those that divested between five and 15 per cent. Average underperformance for those that divested more than 15 per cent was slightly lower at 6.3 percentage points. 

“Most companies are set up to buy assets, not sell them, which means decisions to sell are often made at the wrong time or in the wrong manner. Such mistakes are expensive,” said Jana Mercereau, Willis’s UK head of corporate M&A.

“Defining the right deal, managing talent uncertainty, and rooting out stranded costs can make the difference between a divestiture that succeeds and one that destroys value,” she added. 

Main image credit: Getty