Deloitte Survey: Two-Thirds of Companies Pursue Carve-Outs or Divestitures, Despite Recession
According to survey, strategic buyers show greatest interest, offer highest valuations and complete majority of carve-outs
NEW YORK, Two-thirds (64 percent) of executives said their companies are still pursuing carve-outs, or divestitures, despite the economy and the credit environment, according to a recent Deloitte survey of 100 executives.
Respondents indicated the most important rationales for carve-outs were that an asset was not considered core to the business strategy (66 percent) or the company needed cash and capital (50 percent).
“In light of a challenging economic environment, carve-outs remain an important means for companies to focus business strategies and strengthen balance sheets. The recession has pushed more firms into financial situations where they may be looking to divest operations to raise additional capital. Although companies might prefer to wait until market conditions improve, many don’t have that luxury,” said Bob Coury, national managing director of Deloitte Corporate Finance LLC. “When companies need to divest operations quickly, they typically trade premium valuations for the certainty of getting a deal done.”
In discussing prices sought for divested assets, 83 percent of survey respondents indicated that strategic buyers typically offer the highest valuations.
“The broad consensus among the executives surveyed is that strategic buyers — both domestic and foreign — show the greatest interest, offer the highest valuations and complete a majority of carve-out transactions,” Coury said. “Driving this disparity is the fact that strategic buyers don’t always face the same challenges encountered by financial buyers. While it can often be easier for strategic buyers to integrate carve-outs into their existing infrastructure, financial buyers may lack the appropriate operational infrastructure, management teams and industry experience making integrations more challenging. As a result, financial buyers often offer lower bids to account for significant investments needed on the back-end of a carve-out acquisition.”
Of the executives surveyed, 40 percent had attempted a carve-out they were unable to complete in the past three years. For those reporting incomplete divestitures, 39 percent said that they would attempt to divest the same asset again in the next three years.
“Initial carve-out attempts are not always successful. Quite often, sellers move hastily, without researching the market or — more importantly —properly preparing the asset for a sale,” said Andrew Wilson, national managing partner, Divestiture Services, Deloitte & Touche LLP. “Lack of thorough preparation can cause sellers to develop unrealistic value expectations based on limited financial and market data. This typically results in the delay of a transaction, a sale at a reduced valuation or an unsuccessful carve-out divestiture.”
According to the survey, the most common reasons for not completing a carve-out divestiture were: sellers were unable to obtain the price sought (67 percent); buyers came back with new, reduced terms (38 percent); sellers could not find a buyer (33 percent); and, buyers were unable to secure funding (32 percent).
To review the full survey results, visit www.investmentbanking.deloitte.com/divestiture
About the Survey
Deloitte contracted Bayer Consulting to conduct a survey of 100 U.S. executives. The survey was conducted online from June 5 through October 31, 2008.
The survey defined a carve-out or divestiture as the sale of a subsidiary or a portion of a company’s business, which could include a plant, other facility, product line, business unit or division.
Respondents worked in organizations with annual revenues ranging from less than $100 million (41 percent) to $1 billion to less than $5 billion (17 percent) and $5 billion to less than $25 billion (23 percent) to $25 billion or more (20 percent). Respondents predominantly represented the manufacturing (50 percent) and financial services (22 percent) industries.
As used in this document, “Deloitte” means Deloitte Corporate Finance LLC, Deloitte Financial Advisory Services LLP, Deloitte & Touche LLP and Deloitte Services LP, separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
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