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Crisis may propel many firms to divest: E&Y
March 18, 2009 17:02 IST
More than half of the companies across the world, including Indian firms, are likely to consider divestment of parts of their businesses due to deteriorating global economic situation and liquidity crunch, a latest survey by Ernst & Young says.
Frozen credit markets and a rapidly deteriorating global economy are driving an increasing number of distressed asset sales and historic deals, the survey titled 'Divesting in turbulent times: Achieving value in a buyer's market' stated.
The survey found out that globally more than half of respondents (53 per cent) confirm they are more likely to consider divestments due to current economic events.
Moreover, nearly 68 per cent of Indian respondents mentioned the continuing need to focus on the core business is the primary reason for planning a divestment.
Interestingly, about one-fourth of respondents globally anticipate emerging market buyers would be the main acquirers of assets in the next two years, the survey revealed.
"With limited cash and emerging economies set to become one of the key buyers of corporate assets worldwide, companies now need to think more creatively, prepare more carefully, act more decisively and with greater flexibility to ensure their deals are successful...," E&Y India Transactions Advisory Services Partner and National Director Ranjan Biswas said.
Indian companies are also expecting a major change in the profile of buyers over the next two 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, Biswas added.
The survey also revealed that respondents expected deals to be more sophisticated in process and structure, given the increasingly complex demands from buyers.
Almost half (48 per cent) are more likely to consider multiple transaction types, including third party sales, spin-offs and joint ventures. The E&Y report stated sellers need to simultaneously pursue multiple divestment options to ensure successful divestitures.
Further, Indian companies have on an average done one divestment in the past two years compared to 2-5 divestments of their global peers.
Indian firms as compared to global peers are quite high on confidence about having an appropriate transaction strategy with 29 per cent of respondents in the country strongly agreeing as compared to only 10 per cent globally.
The E&Y survey also stated that a majority of Indian firms regularly examine their business portfolio and prefer strategically fit businesses in their portfolio.
The most popular mode of divestment has been selling 100 per cent stake to a third party versus forming a JV or seeking a minority investor.
Over 360 C-suite level executives (senior management executives) participated in the survey, each representing companies including more than 40 Indian firms with an annual turnover of $1 billion.
Besides, Indian companies have emerged more optimistic with the time-frame and have cited three-six months as sufficient time to prepare for and execute a divestment.