Divestiture Trends: 2023 Could See More Sell-Offs, but Expect Lengthier and More Extensive Diligence
Tuesday, June 20th, 2023
Against the backdrop of continued economic uncertainty, inflation and rising interest rates, nearly half (47.9%) of M&A professionals say they are likely to pursue a divestiture in the coming 12 months, according to a recent Deloitte poll. Among those contemplating divestitures, 40.4% of those polled say their organizations are likely to pursue 1-2 divestitures in the year ahead while 7.5% say their organization may pursue as many as 3-4.
Of M&A professionals who report plans to pursue a divestiture in the coming year, more than half (54.4%) say their organizations are most likely to pursue a sell-off (e.g., the sale of a business unit or company to another organization). IPO-oriented equity carve outs (13.8%), spin-offs (13.8%) and parent company dissolutions or de-mergers (3.3%) are less likely to occur in the next 12 months, according to those polled.
"We're watching current market conditions drive down interest in IPOs as interest rates rise, making the outright sale of underperforming or non-strategic assets paramount for the operational health of many organizations," said Brenda Ciampolillo, a Deloitte Risk & Financial Advisory managing director in mergers and acquisitions, Deloitte & Touche LLP. "The good news is that de-merger plans, which are similar to bankruptcies, are projected to remain low, indicating that debt management at many organizations continues to be effective."
According to nearly one-quarter (24.2%) of M&A respondents, the need to divest non-core assets is most likely to drive organizational divestiture plans over the next 12 months, followed closely by the need to raise cash to support future operations (20%) and the need to strengthen balance sheets (19.8%).
Yet, successful diligence is necessary to execute divestiture plans and buyer-requested diligence is expected to increase in the coming year. More than one-third (35.2%) of M&A professionals expect the duration and extent of buyer-requested diligence to increase in the coming year, while a similar number (34.7%) expect no change at all.
"We typically see less emphasis on diligence in a seller-driven market as buyers compromise to get deals done – but that's not what's happening," said David Oberst, a Deloitte Risk & Financial Advisory partner in mergers and acquisitions, Deloitte & Touche LLP. "Borrowing costs have gone up, but valuations have yet to come down. As a result, buyers are holding fast to diligence as a means to justify paying a perceived premium on assets and sellers should focus on getting their houses in order to meet that challenge and help seal deals."