Can divesting what holds you back move your strategy forward? 2021 Global Corporate Divestment Study India About the study The EY Global Corporate Divestment Study is an annual survey of C-level executives from large companies around the world, conducted by Thought Leadership Consulting, a Euromoney Institutional Investor company. ► How do businesses maximize value from their divestment? ► How do businesses identify non-core assets to divest? ► How are businesses using funds raised from divestments? ► What are the key challenges faced by CEOs while making decision to divest? ► What metrics are businesses using to monitor their portfolio? ► Are companies realizing the strategic benefits through divestments? Author Naveen Tiwari Produced in association with Transaction Strategy and Execution Lead, EY LLP Page 2 2021 India Corporate Divestment Study Executive summary How CEOs can develop a How CFOs can drive Why divestments should be successful divestment strategic decisions through a catalyst for CEOs to strategy portfolio reviews reimagine RemainCo 60% 86% 50% of CEOs consider assets that of CEOs acknowledge the of companies acknowledge do not contribute to long-term need to provide better not placing enough emphasis value creation as non-core. guidance on what is core vs. on RemainCo during their last non-core. divestment. 80% 71% 71% of companies used the of companies use earnings per of companies find maintaining proceeds from their share and return on invested operating performance of divestment to invest in capital as key KPIs to monitor RemainCo during divestment technologies to enhance business health. period a challenge. digital capabilities. 86% 53% 53% of CEOs acknowledge companies say the top say they failed to achieve challenges in providing better strategic benefit of their last results in streamlining guidance of what’s core vs. divestment was a redefined RemainCo’s management non-core in relation to their growth strategy focused on structure in their last major corporate strategy. core businesses. divestment. Page 3 2021 India Corporate Divestment Study How CEOs can develop a successful divestment strategy Page 4 2021 India Corporate Divestment Study The pandemic has companies looking at divestments as a way to generate funds from non-strategic assets Q Will the continuing effects of the COVID-19 pandemic affect your plans to divest? ► Seventy-three percent (74%) of respondents say they are planning to divest in the next 24 months, as the COVID-19 37% pandemic has created a need for capital to support business requirements. ► While most companies expect to continue with their divestment process, nearly 40% 63% plan to accelerate their divestment plans. ► Timely divestment of assets can provide companies with the much required funds to manage liquidity and fuel growth during May accelerate divestment plans this crisis. Do not expect to impact divestment plans Page 5 2021 India Corporate Divestment Study Divestments provide companies with an effective avenue to raise funds for capital allocation even though they are not viewed as such Do you agree or disagree with the following statement: Divestments are viewed as an essential part of Q the capital allocation process? ► The majority of companies do not consider divestments during their capital allocation process. ► Companies should actively consider 47% divestments as a significant source of 53% raising capital for investment in growth opportunities. Disagree Agree Page 6 2021 India Corporate Divestment Study Better preparation by sellers can accelerate the divestment process and decrease the price gap Thinking through your company’s most recent major divestment, how would you assess the results Q against expectations in the following areas? Price ► Almost 90% of respondents 90% 10% acknowledge that it is challenging to meet divestment expectations on Timing price and timing. 87% 13% ► Impact on valuation multiple in remaining business In fact, 100% of the respondents indicate that there is a 10% price gap 33% 67% between a seller’s expectation and what a buyer is willing to pay. Did not meet expectations ► A well-managed divestment process, including comprehensive sell-side Met or exceeded expectations diligence (commercial, financial, operational, etc.), enables the company to better prepare for buyer’s diligence, thus decreasing the price expectation gap. Page 7 2021 India Corporate Divestment Study Businesses that do not support long-term value creation and are not aligned with company’s capital allocation strategy are prime candidates for divestments What factors do you use to identify non-core businesses/assets for divestments? Q (Select all that apply.) Does not leverage company’s core ► While determining which assets Lower revenue/profitability capabilities profile than other are core, companies are businesses prioritizing factors such as 50% potential for long-term value 57% creation, growth profile and Diminishing alignment of capital needs. 50% 30% customer demand 60% Case study 40% 23% A large Indian conglomerate has been Capital needs divesting its non-core and sub-scale assets in exceed willing insurance, ports, etc. They wanted to focus on capital allocation Insignificant cash contributor its core businesses of EPC (engineering, Not aligned procurement and construction) and services to company’s Not a contributor to long-term value as its broader horizontal approach across vision/mission creation (e.g., improved operational industries no longer supports shareholder sustainability, adaptive business model) value creation. Page 8 2021 India Corporate Divestment Study Divestments have provided the funds for companies to enhance digital capabilities to overcome business challenges due to the COVID-19 pandemic What did you do with the funds raised from your most recent divestment? Q (Select all that apply.) Invested in technology ► The COVID-19 crisis has highlighted 80% the need to enhance digital Paid down debt capabilities, with 80% of companies 53% using the divestment proceeds to invest in technology. Invested in new products/markets/geographies 50% ► Divesting underperforming assets will Returned funds to shareholders help organizations in: 33% Streamlining their operating model Made an acquisition 27% Raising funds to deleverage Bought back shares Investing in capabilities for future 27% growth Page 9 2021 India Corporate Divestment Study CEOs face multiple challenges during divestments, including finalizing a business strategy for RemainCo What are key challenges that CEOs face when deciding to divest? Q (Select all that apply.) Articulating the value of the separated entity on a stand-alone basis ► Articulating the value of a divestment to 86% stakeholders is one of the toughest challenges being faced by the CEOs. Organizational distraction compared to growth initiatives 71% ► In addition to sharing the divestment Ensuring you have a strategy for the remaining business rationale, CEOs should share a vision on 43% how RemainCo can unlock value and grow as a result of the divestment. Perception that management failure led to divestment 43% ► A well-formulated divestment strategy will Ability to galvanize support on use of funds to be raised help CEOs effectively communicate the 29% go-to-market strategy, potential operational synergies from related products and technology, or geographic coverage for RemainCo. Base = 7 Indian CEOs Page 10 2021 India Corporate Divestment Study A robust project management process and the right tools and resources are critical to enhance value from divestments With respect to your last major divestment, would you agree or disagree with the following Q statements? Lack of access to the right tools and data slowed decision-making around project management milestones. ► A divestment is a complex process with 63% 37% interdependencies across business units and functions. Lack of understanding around regulatory requirements deferred closing. 60% 40% ► Companies need to implement a robust We significantly underestimated the internal resources and time to prepare the divestment program management process with for sale. 53% 47% adequate internal resources to drive divestments. Agree ► Ninety-three percent (93%) of companies anticipate that tax-related issues will Disagree continue to impact their divestment strategy over the next 12 months. Page 11 2021 India Corporate Divestment Study Key takeaways ► Have a clear view on strategic alignment, competitive advantage and potential for long-term value creation for each business ► Pursue divestments to help accelerate investments in technology, new products or geographies and to fuel new growth for RemainCo ► Communicate efficiently with stakeholders the need to divest a business that is not a strategic fit, even if it has strong performance Page 12 2021 India Corporate Divestment Study How CFOs can drive strategic decisions through portfolio reviews Page 13 2021 India Corporate Divestment Study Divestments should be a core part of corporate strategy rather than treated as one-off decision based on short-term needs Q Do you agree or disagree with the following statements? We have held onto assets too long when we should have divested them. ► The majority of executives acknowledge 70% 30% the need to act faster to divest non-core assets that can help accelerate Shortcomings in our portfolio/strategic review process have sometimes resulted in shareholder return. failure to achieve the intended divestment results. 63% 37% ► A well-defined portfolio strategy, coupled with the