Asian companies need to act fast to optimize their portfolios

Asian companies need to act fast to optimize portfolios, maximize value and address enterprise, social and governance (ESG) considerations, writes Paul Murphy, a leader in EY’s Strategy & Transactions division.

Divestments can help companies navigate the post-pandemic environment successfully. Selling off non-core businesses can provide both the capital to fund investment and the operational streamlining to reduce risk and build resilience, thereby navigating uncertainty and changing priorities. 

However, EY’s 2021 Global Corporate Divestment Study reveals that global companies are failing to meet expectations for their divestment’s sales price, timing and how they affect the valuation multiple of the remaining business (RemainCo). But, what could be causing these shortcomings?

Divestments can underperform when they are treated as one-off decisions based on short-term financial factors, rather than being closely aligned with the overall corporate strategy. In fact, nearly 60% of CEOs acknowledge they should provide better guidance as to what they regard as core and non-core businesses. 

Fortunately, the study found that a large majority (73%) of Asia-Pacific companies intend to divest a portfolio business within the next two years to support investment in areas such as technology and supply chain optimization. Building the case for divestment can be difficult unless there are clear strategic priorities to win the support of the board and stakeholders. 

Even so, appetite for merger & acquisition remains high among companies in Asia-Pacific, with 53% of respondents saying that they are actively planning to pursue acquisitions in the next 12 months, according to another EY survey.

The EY divestment study surveyed more than 300 Asia-Pacific executives in the period after the onset of the Covid-19 pandemic. We took a deep dive into the key drivers behind the motivations for companies to divest, including environment, social and governance (ESG) considerations as well as changing customer behavior, the desire to streamline operating models, and other external pressures.

Concerns over sustainability and social issues

ESG considerations are rapidly gaining in importance among Asia-Pacific companies, particularly given the elevated frequency of natural disasters in the region being linked to climate change. Energy transition and decarbonization is increasingly on the board room agenda. As such, companies are recognizing a long-term value imperative to act. 

Of the companies surveyed, 84% affirm that sustainability challenges and social issues are directly influencing their divestment plans, almost double that of Europe (47%) and over six times that of the Americas (14%). 

Social issues such as diversity, equality & inclusion and access to health care have also recently been placed under the spotlight due to the pandemic and social justice movements around the word. Influenced by these global trends, over half of Asia-Pacific companies (52%) cite social issues as the most important trigger that helped prompt their last divestment, notably more than the global average of 27%. 

Intensified focus on tech

Companies in Asia-Pacific have boosted investment in technology, particularly over the past six months as a result of business models stress tested during the height of the pandemic and the resulting business model adaptation from long-term impacts. With investments in technology being the top-ranked use of proceeds in Asia-Pacific, this recent uptick has clear implications for divestments.

Almost three quarters of companies (73%) use funds raised from their most recent divestment to invest in technology innovation, close to the global average of 79%. 

External factors have dramatically increased the pace and priority of activity. An overwhelming 89% of Asia-Pacific companies reported that changes to the technology and competitive landscapes are directly influencing their divestment plans, a notable rise in this response since 2020, when only 60% of Asia-Pacific companies were of the view.

Companies are shaking up their supply chains

The disruption caused by the impact of the pandemic on all industry sectors, combined with potential geopolitical tensions, has prompted companies to reassess their supply chains in favor of improving their resilience to unforeseen disruptions. These considerations have not resulted in much divestment activity yet, but Asia-Pacific companies acknowledge political tension and volatility between key markets as the largest geopolitical risk that could accelerate their long-term divestment plans. 

The trend remains much lower than other regions. 31% of companies were influenced to divest by geopolitical uncertainty, half the global amount (62%). Meanwhile, 34% of companies in the Asia-Pacific region cite changing regulatory and antitrust environments in key markets as factors that may accelerate divestment plans, compared to 57% globally. 

All in all, Asian companies are confident and relatively progressive. Most companies experienced disruption – either as a supplier or customer, so they are diversifying away from overreliance on any single counterparty or market that deviate from their core businesses. Every boardroom is laser-focused on building resilience this year. 

Asian companies will need to continue long-term due diligence and best practice divestments to fund more advantageous investments, and operational streamlining for sustainable resilience. 

The views reflected in this article are the views of Paul Murphy and do not necessarily reflect the views of the global EY organization or its member firms.