16 June 2023

Market drivers and pitfalls in non-core disposals

In recent years, many companies have re-evaluated the potential of their businesses and are now considering divesting their non-core assets. This enables the firms to focus on assets providing long-term value, whilst at the same time, presenting M&A opportunities for well-funded companies.

Key considerations and drivers

The post COVID world has seen greater strains on supply chain security, inflation in wages, labour scarcity and heightened commodity volatility. Geopolitical tensions, increasing trade friction, and renewed interest in industrial strategy are all accelerating non-core divestment considerations.

Today, boardrooms are consumed with the topic of supply chain de-risking, in particular with reference to China. De-risking- as opposed to economic decoupling- is a nuanced view that sees global trade and investment as deep-rooted. Solutions include diversification and avoidance of excessive concentration by country and industry. Connected to this trend of de-risking is nearshoring. A Buck Consultants survey, published in February 2022, found more than 60% of European companies are looking to on-shore or re-shore Asian production in the next three years, with the main winners being Central and Eastern Europe, including Turkey.

These megatrends of de-risking and nearshoring are combining to spur further divestments. Below we explore additional factors that are prompting non-core disposals:

Governance of international assets has become increasingly fraught

  1. Regulatory changes and local compliance: trends continue to favour local management and a deep local presence. The ability of foreign owners to respond to international changes is becoming ever more costly and challenging
  2. Prioritization of domestic factors: Foreign brands and companies are at a strategic disadvantage (e.g. consumer preferences, trade policies)
  3. Opportunity cost relative to home market: In a fragmenting world with increasing cross-border barriers, home market advantage can lead to increased profitability and/or simpler forms of control and management structure
  4. Risk appetite: Increasingly, asset owners must decide on multi-year, global strategies. A decline in risk appetite is leading to a flight to safety
  5. Variation by sector: Industrial strategy has focused on politically sensitive sectors that affect employment or security; however some sectors such as healthcare and outsourced technology services have been less impacted.

M&A considerations:

  • Slowing global GDP growth will accelerate divestments: Weaker growth and fragmented regional assets will accelerate non-core, international divestments
  • De-risking and divestments flow in both directions: Asset owners in both Asia and the West are actively reviewing and pursuing non-core divestments in respective foreign markets
  • Challenges in interfacing with local management: Differences abound in governance styles which are often exacerbated by the de-prioritisation of local operations
  • Local assets are often at risk of underperformance: Lack of oversight and investment can lead to relative underperformance and therefore valuation expectation mismatches upon sale
  • Lack of buyer knowledge and relationships: Lack of local knowledge restricts and impedes optimal divestment to a local buyer
  • Sale process requires a bridge between local management and foreign owner: Few M&A practitioners have the reach and expertise to help navigate international non-core divestments successfully.

BDA’s view

With changing market conditions, corporates are re-evaluating their operations with a view to exiting certain business lines to focus on long-term core business areas. We anticipate an important increase in ownership rationalisation driven by risk mitigation, regional compliance and a focus on domestic comparative advantage.

BDA is well placed to support our clients as they confront these opportunities and challenges by virtue of our global presence and significant experience in corporate carveout and cross-border divestments.

Recent selected BDA examples of cross-border divestments between Asia and the West:

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese Government-owned bank with US$150bn of assets. bdapartners.com

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