Capital Markets Reward Divestitures With Higher Valuations

MUNICH, GERMANY--(Marketwired - Sep 22, 2014) - Capital markets reward divesting companies with increased valuations, according to The Boston Consulting Group's 2014 report on the M&A market, Don't Miss the Exit: Creating Shareholder Value Through Divestitures.

BCG's analysis of more than 8,300 divestitures over the last 24 years shows that the stock price of the average seller increased by 1.4 percent in the days following the divestiture announcement. Because divesting companies expand their EBITDA multiples by an average of 0.4 times on top of an already improved operating margin, investors bid up divesting companies' share prices immediately following an announcement in anticipation of these increases.

Not all divestitures are created equal, however. Investors reward companies that have credible exit strategies and punish those whose rationales and execution are unconvincing. BCG research shows that 55 percent of all divestitures created value, as measured by the average cumulative abnormal return (CAR) -- the change in market value over a seven-day window centered on the transaction announcement date -- compared with a broader index. Successful sellers received an average increase in CAR of 6.6 percent, while the other 45 percent saw an average drop in CAR of 4.8 percent.

"Companies often have a potent value-creating weapon in their strategic arsenals, and more and more CEOs are using it," said Jens Kengelbach, a BCG partner and coauthor of the report. "The truly strategic question any company or CEO needs to ask is whether one company's assets could have a higher value for another company, and thus a better owner. Increasingly frequently, the answer is yes."

For divesting companies, maximizing value depends substantially on choosing the right exit route. Companies have three basic alternatives: a straight trade sale to another buyer; a spin-off to the company's existing shareholders; and a carve-out, in which the parent company sells a partial interest to the public while retaining ownership -- often a controlling interest.

In a surprising and counterintuitive finding, BCG found that investors reward spin-offs most highly of the three principal divestiture routes, even though spin-offs generate no cash for the seller and typically take more time than trade sales to execute. The post-announcement return for spin-offs was 2.6 percent -- double the 1.3 percent and 1.2 percent generated by trade sales and carve-outs, respectively.