{"componentChunkName":"component---src-templates-page-js","path":"/divestments/","matchPath":"/divestments/*","result":{"pageContext":{"matchPath":"/divestments/*","data":{"id":"playlist-12--new--","seo":{"title":"Divestment strategy","description":"EY-Parthenon outlines tried-and-tested approaches to leading successful company divestments that maximise value, with this best practice playbook","image":"https://impact.economist.com/projects/real-world-strategy/images/share12.jpg"},"link":{"id":"new--playlist12","basePath":"/divestments/","path":"/divestments/","type":"brand_ey_parthenon","img":{"thumb":"/images/playlists/thumb_pl_12.jpg","full":"/images/playlists/full_pl_12.jpg","alt":""},"label":"Divestments","pretitle":"Divestments","title":"Downsize, decouple, drive value"},"menu":[{"id":"playlist8","basePath":"/ceo-video-series/","path":"/ceo-series/","type":"brand_ey_parthenon","watermark":"ceo","img":{"thumb":"/images/playlists/thumb_pl_08.jpg","full":"/images/playlists/full_pl_08.jpg","alt":""},"pretitle":"Strategy in Action:<br/>A CEO Series","title":"Watch Now"},{"id":"playlist11","basePath":"/geostrategy/","path":"/geostrategy/1/","type":"brand_ey_parthenon","img":{"thumb":"/images/playlists/thumb_pl_11.jpg","full":"/images/playlists/full_pl_11.jpg","alt":"Winding valley with green and brown hilly terrain. 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The ability to be nimble and focused takes on greater significance than consolidation and size. It’s no wonder, then, that corporate separation activity is on the rise. In 2022 alone, there were 30 announced global separations, representing about 17% of publicized transactions over the past decade. This spinoff activity is set to continue: in Jan 2024 nearly a third (29%) of global CEOs expected to actively pursue a divestment, spin or IPO within the following year, according to <a href=\"https://www.ey.com/en_gl/ceo/ceo-outlook-global-report\" target=\"_blank\" rel=\"noopener noreferrer\">EY CEO Outlook Pulse Survey.</a>","While the 2010s defined a decade of megamergers and portfolio diversification, the post-pandemic corporate landscape is requiring a rethink of effective growth strategies for the near term. Challenging competitive conditions, coupled with a rapid rise in interest rates and investor emphasis on profitability, are having a material impact on growth priorities and associated capital allocation. Also, corporate portfolios are rife with complexity: about two-thirds of companies listed on the S&P 500 index have three or more business segments with over US$500m revenue.","For those conglomerates considering a separation, it is best to act from a position of strength to transform the organization for the near and long term. The global EY organization teamed up with Goldman Sachs to develop comprehensive insights into how to optimally untangle while still maximizing value for both RemainCos and NewCos. The research combines interviews with some of the world’s top executives with the quantitative analysis of more than 160 global transactions from 2012 to 2022 in which the business being separated had a market capitalization greater than US$1bn."]}},{"type":"StatImageBlock","content":{"image":{"src":"/images/t2/p-12-1-img.jpg","alt":"Blurred image of lights, a sunset and a truck on the highway."},"paragraphs":["Corporate portfolios are rife with complexity: About two-thirds of companies listed on the S&P 500 index have three or more business segments with over"],"stat":{"main":"US$<span>500</span>m","post":"revenue"}}},{"type":"CopyBlock","content":{"paragraphs":["Companies largely seek to separate so they can seize an opportunity or manage risk. It is clear that businesses must truly transform themselves to maximize value and achieve the benefits of separation. Corporate separations are less a conscious uncoupling and more a form of emptying the nest, where ParentCo and NewCo find their independence, allowing each to grow and thrive separately. EY and Goldman Sachs analysis indicates that well-executed separations can lead to an excess total shareholder return of 6% on average over two years post-close.","Although outperformance is not guaranteed, executives’ strategic vision leading up to the separation is crucial. The global EY organization and Goldman Sachs developed the following five leading practices that are a hallmark of any successful corporate separation."]}},{"type":"NumberedListBlock","content":{"list":[{"num":"01","title":"True re-envisioning","paragraphs":["ParentCo leadership must identify the operational improvements and cost optimization initiatives for both RemainCo and NewCo before the transaction announcement, allowing ample time to execute thoughtfully, rather than cloning for purposes of expediency. ParentCo should also conduct a cost-benefit analysis and pursue high-value and complementary mini-transformations that impact growth and gross margins. These include, for example, investing more in capabilities and projects that are a source of differentiation, identifying opportunities to move appropriate systems to new solutions, or optimizing pricing strategies and channel expansion. EY and Goldman Sachs analysis indicates that typically RemainCo focuses on margin improvement post-separation, while NewCo concentrates on revenue growth. Equal attention needs to be given to both companies, highlighting each business’s attributes and how to optimize them."]},{"num":"02","title":"Dedicated management","paragraphs":["Allowing leadership teams to focus on the priorities of their specific business is an important step that drives outperformance. NewCo leaders should be identified early in the separation process to give them ample time to shadow ParentCo executives on the responsibilities of managing a public company. This gives executives the ability to practice and hone their new tasks. More than 60% of NewCo CEOs and CFOs were promoted internally, according to EY and Goldman Sachs analysis. Although this is good because they understand the business unit, they may not, however, have experience leading a public company, which can be remedied through job shadowing and mock investor meetings."]},{"num":"03","title":"Tailored capital allocation strategies","paragraphs":["Capital allocation is likely to be different, depending on company objectives. ParentCo should set up RemainCo and NewCo with capital structures that allow ongoing access to liquidity, balance sheet optimization and operating cashflow – with enough room to grow independently. Although each separation is customized, RemainCos tend to focus on margin improvement and cash generation, while NewCos often prioritize growth. EY and Goldman Sachs analysis shows that 67% of RemainCos see a reduction of SG&A cost over two years post-separation, and that NewCos typically grow revenue by 4.7%."]},{"num":"04","title":"Genuine leadership in managing the separation","paragraphs":["Given that separations take time and money, mapping out milestones and timing of major decisions early ensures there is stakeholder alignment and transparency, priority management, and efficient allocation of resources and capital. EY and Goldman Sachs analysis shows that more than 60% of transactions took longer than nine months from announcement to close, with one-time costs of 1% to 6% of NewCo equity value. However, the potential for value creation significantly outweighs these costs. Balancing timeline commitments and costs is key, as is allowing NewCo to focus on value creation. Establishing a governance structure to manage multiple workstreams is highly recommended."]},{"num":"05","title":"Communicate with stakeholders","paragraphs":["Managing the varying priorities and expectations of customers, suppliers, employees and shareholders is critical for success. Given the uncertainty surrounding separations, regular communication goes a long way in building competency and trust of both RemainCo and NewCo. It is important to understand what each stakeholder may need to feel comfortable with the path forward. Customers, for example, will need appropriate information and guidance, while suppliers will need contract and business continuity updates. What’s more, sharing the equity stories of each company allows stakeholders to gain familiarity and feel at ease with the process."]}],"cta":{"label":"Read more","link":"https://ad.doubleclick.net/ddm/trackclk/N284201.139656THEECONOMIST/B31553931.388136977;dc_trk_aid=579524425;dc_trk_cid=210642330;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1"},"postCopy":["In summary, separation is a catalyst for corporate transformation. Executed effectively, separations can create opportunities, manage risk and create shareholder value. Executives who combine an offensive and defensive approach to their portfolio and execute separations from a position of strength see their companies rewarded by markets as they greatly increase the chances of delivering long-term returns.","True value is created by maximizing the benefits of the separation, and by establishing the two new public companies as streamlined operations with distinct equity structures, capital strategies and focused leadership teams reimagining their offer."]}}]},{"id":"casestudies","theme":"dark-bg","blocks":[{"type":"CaseStudyBlock","content":{"title":"Daimler’s vehicle for change","video":{"title":"How can the power of carve-outs unleash business value?","src":"https://players.brightcove.net/1153191510001/default_default/index.html?videoId=6352123568112"},"paragraphs":["In 2018, Daimler AG transformed its business by carving out major divisions and creating three independent units; Mercedes-Benz AG, Daimler Truck AG and Daimler Financial Services. This transformation, across 65 countries, allowed each unit to operate in a more agile way, take advantage of new business opportunities and enhance Daimler's appeal in the capital markets."],"cta":{"label":"Read more","link":"https://ad.doubleclick.net/ddm/trackclk/N284201.139656THEECONOMIST/B31553931.393547056;dc_trk_aid=585004737;dc_trk_cid=214656834;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1"}}}]}]}},"id":"new--playlist12"}}}