When capital is scarce to fund your acquisition plans, your private equity investor friend also prefers to stay on the sidelines till the market stabilizes, but the economic downturn is telling on your company, what do you do? You are left with little options than to adopt creative modes of divestment to keep yourself going in such difficult times. About more than half of deal doers would consider divestments due to current economic events, said an E&Y report.
The survey which included 40 Indian companies, each with a $1 billion turnover, revealed that compared to global peers, Indian companies were quite high on confidence about having an appropriate transaction strategy – 29% Indians strongly agreed, compared to only 10% globally.
For Indian companies, the continuing need to focus on the core business is the most important factor when planning a divestment, said the report. In the wake of such deepening slowdown, core business is now being defined more tightly, so anything that is not generating a level of cash or profit is frequently classified as ‘non core’, according to the report.
Globally, disposal of non-performing assets (NPAs), looking for cash – to bolster the balance sheet, fund acquisitions or pay down debt were also considered as factors to prompting a divestment.
Emerging Market Buyers To Become The Major Acquirer of Assets
The report indicated a shift in buyers from domestic to overseas markets. About 25% respondents globally, anticipate emerging market buyers will be the main acquirers of assets in the next two years, which is double the level of activity in the previous two years (11%).
Companies in India too are expecting a major shift in the buyers over the next 2 years. While in the last two years companies have sold their assets mostly to domestic strategic buyers, in the coming two years, most strategic buyers are expected to come from overseas, both developed as well as emerging markets. The role of private equity players is also expected to increase significantly,” Ranjan Biswas, Partner and National Director, Transactions Advisory Services at Ernst & Young India said.
New modes of divestments: Third party sales, spin-offs and joint ventures
The report indicated that the deals are expected to be more sophisticated in process and structure, given the increasingly complex demands from buyers. Those being considered are a multiple transaction types, including third party sales, spin-offs and joint ventures. Sellers need to now simultaneously pursue multiple divestment options to ensure successful divestitures, said the report. Increasingly, corporates are deploying portfolio management modus operandi thus far followed by private equity firms to maximise on value.
A Buyer’s Market
While a large number of firms are deferring their plans of divesting, businesses with strong balance sheets view the current times as the most appropriate for making acquisitions as the valuations are relatively lower. Also, a large number of distressed assets are now available in the market. Hence, businesses are now seriously looking at acquisitions. The report, therefore says that that the prevailing sentiment is that of the buyer’s market.