Themes in Private Equity: Impact Increases in Corporate Divestitures
At the beginning of the year, we set out four key themes that we believed would have a significant impact on the PE market this year. Now that we are beyond the halfway point of 2017, we‘re taking the opportunity to dive deeper into topic two on our list: An increase in corporate divestitures. We will examine the bearing this has had on the PE market so far this year and what continued impact it is likely to have as the year progresses.
Geopolitical unpredictability, rapid technological change and macroeconomic uncertainty, combined with a low-growth economy, pressure from shareholders and changes in consumer preferences have caused severe disruption to business. In response, many corporate executives are taking a fresh look at their business model and identifing areas of the business which no longer fit their strategic aims, with a view to divesting them through a carve-out.
As a result, we have seen a steady increase in the amount of divestures over the last several years and it looks set to continue for the foreseeable future. According to Mergemarket, there was a 34% increase in the total value of divestments worldwide in 2016. This upward trend continued in the first half of 2017 as a result of M&A activity, and a focus on strategic core assets in the chemicals, consumer goods and other industries. A 2017 Global Corporate Divestment study conducted by EY found that nearly half of companies globally (43%) plan to divest in the next two years.
The trend in corporate divestures has created carve-out acquisition and value creation opportunities for PE investors. However, it can be an extremely complex process and requires careful strategic planning to minimize the disruption to the main business. Companies that lack the right in-house capabilities, risk increased costs and an eroded valuation. Conversely, having the right capabilities and resources necessary to “stand-up“ the new company leads to a tremendous opportunity for creating value, particularly in the supply chain and operations of the new entity.
As an example of this strategy in action, we recently worked with a private equity firm to support the stand up of a carve out from a major multinational pharmaceutical and consumer goods company. Our client was seeking specialist capabilities to manage through the challenges of a complex environment and stand up the organization in a very tight time frame. They needed to ensure that the critical functions of the carved-out organization, an API (Active Pharmaceutical Ingredient) manufacturer, were in place and capable of running as an independent company within 14 weeks. In the process of meeting this timeline to create a stand-alone global supply chain capability, we also delivered:
- Zero disruption to trade for the new entity
- Newly negotiated terms that were as good as or better than the parent company
- More than 1,300 purchase orders established with non-essential suppliers 100 key local, regional and global contracts
- Global procurement policy, including schedule of authority and standard terms and conditions
- Comprehensive S&OP framework
- A solid foundation for cross-functional collaboration
Having achieved a fast and clean supply chain stand up, our client was able to focus on identifying areas for value creation opportunity with the new, independent company.
Maine Pointe is a global implementation-focused consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in both EBITDA and cash across their procurement, logistics and operations to enable growth. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors at the lowest cost to business. We call this Total Value Optimization (TVO)™.
Maine Pointe‘s engagements are results-driven and deliver between 3.5:1-12:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings. www.mainepointe.com