Increase In The Divestment Of Non- Core Assets: Recent Trends

In the year 2018, mergers and acquisitions led the deal making spree, crossing a record 100-billion dollars showcasing a trend which is unlikely to lose momentum anytime soon, as an increasing number of Indian companies are looking to divest their non-core assets due to various strategic objectives. Recent data showcases that around 791 transactions resulting in divestments have taken place since the year 2016 in India, valuing more than $50 billion. Keeping pace with the divestment of non-core assets, the Indian Government has also asked various central public sector enterprises identified for strategic sale to immediately prepare a list of assets and initiate dialogue with potential investors and bidders so that their non- core assets can be monetised expeditiously. Also, recently, certain public sector banks have indicated their intent to dispose-off non-core assets running into millions of dollars in order to tackle the non-performing asset problem, and several big corporate houses are also exploring options to sell their respective non-core assets in order to refocus on their core business verticals. 

According to another survey report published by EY titled “India Divestment Study, 2019”, around 81 per cent of the companies surveyed expect to divest in the next two years, while 67 per cent expect large-scale transformational divestments in the next 12 months. 

There are several key factors that are driving companies to consider divestment of non-core assets which include: (a) streamlining of operating models, increasing investment and focus on core businesses where the companies can add value or scale up the business; (b)  stretched balance sheet and increase in the bad loans and non-performing assets; (c) evolving customer preferences, macro-economic uncertainties and shareholder pressure; (d) effective use of the available finite capital of the company with divestment of  the under-performing businesses/assets and re-investment of  the proceeds into their core businesses. Sale of non-core asset seems to be the most efficient option because equity markets are not vibrant and restructuring their existing debt is proving difficult; (e) need of the companies to transform themselves, either through portfolio optimization or cost-structure changes and the divestment of the non-core assets not only tightens the portfolio, but also releases capital for re-allocation to the core businesses and areas where companies need to do to be relevant to the consumer’s changing expectations; (f) non-alignment of non-core assets with the main line of business and the sustained underperformance of business units which is denting the overall profitability of the business as a whole.

While the Indian companies appear keen to undertake divestment of non-core assets, there are certain unique challenges and issues associated with such sale. One of the most important challenge is separating the tightly integrated business. The tighter the integration, the more difficult and costly it becomes to decouple the non-core assets. Concerns also arise as divestiture transactions often require the parent company to provide transitional services to the divested unit for a period after transaction close and because neither the seller nor the buyer is typically in the service-providing business, the result can be expensive and under performing for both, parent company and the divested entity.  Further, divestment of non-core assets may give rise to a number of different tax issues based on the context of the divestment and therefore, the tax angle should be analysed before undertaking such sale. Other associated challenges include costs related to residual business, employee issues, regulatory hurdles etc. 

Divestment is rarely a onetime activity. To undertake the divestment process smoothly, companies should formulate an active strategy, develop a systematic and effective approach to execute the strategy and choose the right course of divestment including assessment of the tax and regulatory hurdles. Even the most difficult divestment obstacles can be overcome through extensive preparation and therefore becoming a prepared seller can help maximize shareholder value and reduce the risk often associated with divestment.