The secrets to successful divestments in Singapore

Turbulence in the Eurozone, weak economic recovery in the US and slackened growth in the China are challenging Singapore companies to rethink their strategies, lower their growth projections and restructure their businesses.

Many are turning their attention to Southeast Asia. The region has demonstrated economic resilience, underpinned by the liberalization of previously undeveloped markets such as Vietnam, Cambodia, Laos and Myanmar; stabilization of developing economies such as Thailand, Malaysia and Indonesia; and continued maturity of developed markets like Singapore.

Various economic indicators are pointing to the buoyant levels of market activities in Southeast Asia. According to World Investment Report 2012, foreign direct investments into Southeast Asia have increased at a compounded annual growth rate of 27.4% from 2009 to 2011.

Data provided by Dealogic showed that cross-border transactions in the region had reached a record of US$26.2 billion for the 12-month period ended July 2012 – more than double the deal value year-on-year.

The investor pull is evident, with multinational companies looking at M&As in the region — be it to tap on its rapidly growing consumer market or gain access to secure supplies and raw materials.

On the other hand, companies in Southeast Asia are also recognizing such interest as an opportunity to optimize their portfolio and exit from non-core businesses.

The Ernst & Young’s Capital Confidence Barometer survey, which was conducted in February and March this year, had revealed that more Southeast Asian respondents were keen to undertake a divestment over the next 12 months.

Ace your divestments

A successful divestiture can be a complex exercise that demands excellence from start to finish. Divestments deserve as much rigor and resources as any M&A transaction. Rushing through the sale of the asset can result in missed value or opportunities.

Once a business is put up for sale, the seller has to anticipate the priorities, needs and concerns of prospective buyers. To make a compelling case to the buyer and enhance the strategic value of the sale, a seller must thoroughly understand the business being sold. A financial advisor (FA) often plays a crucial role in assisting the seller to achieve its divestment objectives.

The message delivered to potential investors is critical. The seller, with the FA, should carefully analyze and understand the competitive landscape to determine the business’ intrinsic value and angle for divestment. Having a detailed analysis of the market enables the seller to craft their value proposition and positioning in the market. In addition, creating a competitive atmosphere can help to manage pricing and timelines.

The FA should also perform due diligence on the business being divested to identify issues and develop a strategy to defend its value. Sell-side due diligence is a cornerstone of divestiture preparation and strategy, enhancing seller credibility and deal value for both buyer and seller.

It is a critical step as it sets the expectations for the prospective deal, preventing any surprises.

In communicating the value of the divested assets, the seller can consider using carve-out financial statements to present a clear and credible picture of the future stand-alone business, as well as incorporate tax issues and consequences so as to create more efficient deal structures and higher valuations.

It is also important to remember that the documentation in relation to the transaction forms the basis of the rights and obligations of the various parties up to closing and post-closing, and will need careful attention from the vendor, FA and legal advisors.

Further, a divestment typically occurs over an extended period of time and involves a number of parties. Having astute leadership, strong project management and clear communication is essential to ensure success
at every stage of the transaction.

Divestment: a mark of failure?

Divestitures are increasingly seen as viable options in a company’s capital strategy. A means of raising, reallocating and preserving capital, divestments create value for the business, and are not necessarily a sign of business failure.

Divestitures are typically driven by strategic and financial motives. Strategic motives refer to a change in strategy, elimination of misfit businesses and unlocking hidden value when the asset is sold at a premium; financial motives refer to the need for corporations to cut financial losses from an underperforming business in order to reallocate or preserve capital for the survival of existing businesses.

There has been a recent trend of consolidation of mid-sized companies in key industries across several Southeast Asian countries. In fragmented industries, such consolidation is often necessary in order to produce industry leaders. The divestment of assets allows companies to raise capital for future acquisitions as they compete for market leadership.

It is crucial for companies pursuing such a proactive M&A strategy to balance both acquisitions and divestments in order to achieve their growth plans. Non-core assets could be more valuable to an acquirer specialized in the business than to its current parent company.

Hence, corporations often create value by divesting their non-core assets to specialized players who are willing to pay a premium for them.

Companies also employ divestments of underperforming or non-core assets as a strategy to optimize their core businesses. This enables them to reallocate and focus resources on their core businesses while cutting unnecessary costs and improving efficiency.

Some companies may also use this strategy as a means to dispose an underperforming asset to refinance future investments or crucial projects. Others may consider a divestment as they recalibrate their portfolio of businesses in line with changing market dynamics and return profiles.

Ultimately, the goal of a company is to maximize shareholder value – and divestments are often used as a means to that end.