Dealmakers are contending with an increasingly complex business environment – and many in the US market are reassessing growth strategies to include asset sales and divestitures to navigate future uncertainties.
Equally significant, nearly half of dealmakers (48%) are considering further divestitures or carve-outs, having already completed at least one such transaction in the past 12-24 months (Figure 2). This underscores the growing role of divestitures as a recurring strategic tool, with 13% of respondents actively exploring additional sell-offs in the immediate future.
One of the most compelling cases for divestitures is the overwhelmingly positive outcomes being realised. Dealmaker sentiments highlight that these benefits have been multifaceted and significant:
Improved financial performance: Most dealmakers (55%) reported that recent divestitures allowed their organisations to enhance their financial positions (Figure 3), allowing them to reinvest in more profitable areas of the business, reduce debt or increase liquidity. “The financial performance was impacted positively by the deal. It improved the funds available for alternative investment options,” says the managing partner at a PE/VC firm from the Netherlands.
Operational cost reductions: Half of dealmakers (50%) also said that divestitures helped lower operational expenses. By divesting assets, organisations can streamline their operations, reduce overheads and achieve greater operational efficiency.
Enhanced focus on core activities: 47% of respondents noted that divestitures allowed their organisations to sharpen their focus on core business areas. By divesting, they were able to reallocate more resources and management attention to primary operations, driving innovation and growth in these critical areas. Equally, 33% of respondents say proceeds from recent divestitures were used to reinvest in strategic business areas, the second-greatest use of these funds (Figure 4). “Rather than opt for debt options, we used the proceeds from the divestiture to enhance automation and implementation of the latest technologies in our industry,” says the CEO of an Austrian corporation.
Beyond the immediate operational and financial benefits, recent divestitures provided dealmakers with greater financial firepower to fund new investments. Most respondents (40%) say that proceeds from their recent divestitures were used to make acquisitions of other businesses (Figure 4). This approach allowed them to rapidly pivot towards more promising market segments or technologies.
“We need to improve our portfolios on a regular basis, and usually divestments are considered with the intention to fund new acquisitions,” says the managing director of a PE/VC firm in the US.
The strategic use of divestiture proceeds demonstrates that these transactions are not merely about shedding assets or reducing costs. Rather, they are increasingly viewed as a means of unlocking capital to fund transformative change and drive long-term value creation.
The M&A environment in the US has been challenging over the past year, to say the least.
Rising interest rates, inflationary pressures and geopolitical uncertainties have created headwinds for dealmaking. These factors have led to increased caution among dealmakers, with some opting to delay or reconsider possible acquisitions. Additionally, regulatory scrutiny is arising as another hurdle many dealmakers must contend with.
That being said, M&A totals in 1H2024 showed a slight increase compared to the previous half-year (Figure 5). Despite the uptick, overall volumes remain below pre-pandemic levels, although deal values seem to have bounced back to some extent following depressed levels in late 2022 and early 2023.
This approach allows organisations to separate specific assets, divisions or business units from the parent company, facilitating more focused management and potentially higher-value realisation. Dealmaker sentiments provide insight into how carve-outs have gained prominence due to their unique benefits.
Almost two-thirds of respondents (65%) say the main advantage of carve-outs is the flexibility they offer in structuring the transaction (Figure 8). Carve-outs enable companies to tailor the divestiture process to meet specific strategic and financial objectives. Unlike outright sales, carve-outs also offer a range of options in terms of how much control the parent company retains, how the transaction is financed and how the newly separated entity is positioned in the market.
For example, a parent company might choose to retain a minority stake in the carved-out business, allowing it to benefit from future growth. This can be an attractive option when the parent company believes in the long-term potential of the business being divested but wants to reduce its exposure.
More than half of respondents (58%) also say that carve-outs lead to greater value maximisation. By separating a business unit or asset from the parent company, carve-outs can unlock hidden value and attract buyers or investors who are specifically interested in that particular business. This newly independent entity can often command a higher valuation as a standalone business, free from the constraints and competing priorities of its former parent.
“Value maximisation is one of the main benefits. Divesting fully from the non-core unit can provide a substantial amount of funds within a short amount of time. It allows companies to improve their competitive position,” says the head of strategy at a US corporation.
Carve-outs also offer advantages in terms of risk management, according to 57% of respondents. In today’s increasingly complex and uncertain business environment, carve-outs enable the parent company to isolate riskier or non-core businesses from its main operations, thereby protecting the broader organisation from potential downsides.
“The risk containment potential is good compared to other divestiture methods. If companies ensure proper legal and compliance methods over time, there are fewer risks and maximised value during the carve-out,” says the head of strategy at a Swedish company.
Most respondents (62%) stated that technological disruption was the primary reason behind their decision to divest assets (Figure 9). As industries undergo digital transformation, dealmakers are being forced to reassess business models and focus on areas where they can maintain a competitive advantage. This often means divesting legacy assets that are no longer aligned with the organisation’s long-term strategic goals.
This trend is particularly evident in sectors where traditional business models are being upended by automation and digitalisation. In manufacturing, for example, firms are opting to divest legacy production facilities that are ill equipped to handle the demand of a digitally driven market.
Similarly, in retail, divestitures are a growing trend. Impacted by the rise of e-commerce, traditional brick-and-mortar retailers are selling off real estate and other non-core assets to focus on expanding their online presence and enhance their digital capabilities.
The second most significant driver (58%) is intensifying market competition and the need for greater agility. In today’s fast-paced business environment, organisations must be able to pivot quickly in response to market shifts and emerging opportunities. Divestitures provide a means to streamline operations, reduce complexity and enhance overall responsiveness to market demands. By divesting non-core or underperforming assets, companies can become nimbler, allowing them to reallocate resources more efficiently and focus on their core strengths.
“Market competition increased in several sectors. There’s been significant changes in the strategies employed for building competitive value. Executing divestitures and focusing on new investments have become more important,” says the partner at a US-based PE/VC firm.
Nearly half (47%) of respondents say that financial considerations played a role in their decision to divest. In an era of economic uncertainty and rapidly changing market conditions, companies are increasingly looking to optimise their capital structures and shore up their financial positions. Divestitures can provide a valuable source of capital, allowing them to pay down debt, fund new investments or return value to shareholders.
“Financial restructuring decisions are somewhat risky, but delays are not ideal for the continuance of the company. We decided to divest from the asset in order to build a better financial position,” says the chief strategy officer at an Italian company.
An emerging trend in divestiture motivations is the growing emphasis on sustainability and ESG factors. 45% of respondents cited these considerations as motivators of recent divestitures, reflecting the growing impact of sustainable business practices and potential pressure from investors, consumers and regulators to address environmental and social concerns.
Importantly, sentiment indicates that recent divestitures and carve-outs are frequently integrated into broader restructuring initiatives rather than being standalone decisions. In fact, 62% of respondents report that their recent asset sales were part of a comprehensive effort to reorganise operations and refine overall business structures (Figure 10).
This suggests that dealmakers are adopting a holistic approach to portfolio management, leveraging divestitures as a strategic tool to reshape their organisations for future growth and enhanced competitiveness. By aligning divestitures with broader restructuring efforts, firms can achieve more significant transformational impact and position themselves more effectively in their target markets.
The most significant challenge respondents faced was negotiating deal terms (68%) (Figure 13). This high percentage underscores the intricate nature of divestiture negotiations, which often involve complex discussions around transition service agreements, employee transfers and intellectual property rights, as well as differing valuation perspectives and the need to balance buyer and seller expectations. Difficulty in aligning interests of buyers and sellers, especially in a market where buyers are increasingly cautious and selective, contributes to the challenges of negotiations.
For these reasons and others, 50% of respondents say that they would take different steps during future negotiations (Figure 14). Many recognise that effective negotiation is central to securing favourable deal terms. This could involve adopting more flexible tactics, engaging with multiple potential buyers or involving third-party advisers to provide objective perspectives.
Many (65%) respondents say managing employee challenges was a major hurdle. This reflects the human aspect of divestitures, which can often be overlooked in favour of financial and operational considerations. Transferring employees to a new ownership structure can create uncertainty among the workforce. Ensuring a smooth transition is crucial not only for maintaining morale but also for preserving the operational continuity of the business being divested.
Accurately valuing the business being divested is another area where respondents (55%) faced difficulties. Valuation is a critical step in the process and sets the foundation for negotiations and ultimately the financial success of the deal. However, arriving at a fair valuation can be difficult, especially in markets with high volatility or when the business has complex financial structures.
In addition to refining their approach to negotiations, respondents also highlight several other areas where they would have made changes to enhance outcomes for future divestitures:
Moving faster to capture value. One of the most frequently mentioned lessons was the importance of speed in completing the divestiture (according to 58% in Figure 14). As the partner at a Swedish PE/VC firm illustrates, “I would have focused on faster execution. The process was not organised. The due diligence process took much longer than we expected, and the negotiations were also more time-consuming than usual.”
Enhancing stakeholder communications. 43% of respondents say they would have improved communications with stakeholders. Transparent and timely communication is critical to managing expectations and maintaining trust throughout the process. Clear communication can mitigate the uncertainty that often accompanies divestitures and helps ensure a smoother transition for all parties involved.
