State of the M&A Market: The Divestiture Paradox

One may anticipate a spike in corporate divestitures immediately following a period of significant economic decline as companies pull back the reigns and focus on reducing non-core / under-performing units.  Similarly, one may also expect activity to decline in the years following as businesses right-size the ship and transition into a more stable market.  Oddly enough, these expectations were contradicted in the years surrounding the 2008 financial crisis. Divestiture activity for the five year period prior to the crisis depicted consistent expansion with annual growth of ~ 3%, but revealed a change once the crisis set in.  Activity constricted by ~ 2% between 2008 and 2009 while companies accessed what to do next, but then started on an upward trajectory with growth of nearly 7% per year thereafter through first half of 2014.  In the five year period (06/09 to 06/14), divestitures increased by nearly 40% from 2,500 per year to 3,500.

Source: S&P Capital IQ and PCE Investment Bankers proprietary data

One interesting observation on the divestiture space is the changing composition of buyers of these divested assets since the crisis.  Strategic buyers have begun to moderate their appetite in acquiring divested assets, despite an upsurge in market activity.  Strategic buyers, which still represent the majority of the divestiture market (86%), have become a smaller proportion of the market.

On the other hand, private equity buyers have been more aggressive in the divestiture arena as they align with overall activity and are taking advantage of an increasing supply of deal opportunities.  Private equity buyers have increased their market share of this segment by nearly 40% in the past five years.

Not only has the buyer landscape changed, but the industry focus has also been altered.  The purchase of divested assets tied to disposable income, like consumer discretionary, have dropped since 2008 while financial related purchases intensified notably.  With 491 failed U.S. banks between September of 2008 and June of 2014, the increase in financial purchases was well warranted.[1]

Source: S&P Capital IQ and PCE Investment Bankers proprietary data

Moving forward, we expect that divestiture activity will stabilize during the next few years.  Valuations will have an impact on the divesture market.  As valuations climb, companies might seek opportunistic sales, however, buyers might retreat if valuations become too frothy.

[1] FDIC – Failed Bank List as of 07/09/14

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Michael Poole

Investment Banking
mpoole@pcecompanies.com
Orlando Office

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