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Global corporate divestment: Trend or expedience?

Global business appears to be headed along an obvious track. But, is this the emergence of a trend global businesses merely want to be a part of or a strategic expedience to raise liquidity and play big in their core business? Will the new decade witness more of this? HOPE MOSES-ASHIKE traces the track, finds the commonality and interrogates the development

The tail end of the last decade witnessed more global businesses making a detour to the path of divestment. While analysts have devoted more attention to the transactions themselves, very little attention has been given to interrogating if this is a mere trend or business expedience.

Perhaps one of the most audacious of such moves was the one made by General Electric (GE) towards the end of the last decade to divest from a number of businesses the corporate giant had made a foray into over the years. Interestingly, these were successful businesses in their own rights making it difficult to suggest that GE was only divesting from troubled businesses. In September 2019, General Electric ( GE) announced its plans to reduce its 50.4 percent ownership in Baker Hughes, an oil and gas company, to 38.4 percent, a transaction the company expects to raise $2.7 billion from. The divestment exercise was structured around a public offering of 115 million Baker Hughes ‘Class A’ shares priced at $21.50 each, and through a private sale of $ 250 million ‘Class B’ Baker Hughes shares to the oilfield services provider.

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The transaction, according to the company, was the first in a series that would see GE offload the remainder of its holding in Baker Hughes over time. It also followed the company’s long list of divestments, from its Biopharma business, distribution power unit, transportation unit, etc, which would leave the global giant focused on its core business of manufacturing of jet engines, power plants and renewable energy. In order words, GE’S divestment could be said to be purely a strategic business decision.

Similarly, Siemens AG, a global powerhouse in electronics and electrical engineering, operating in the fields of industry, energy and healthcare as well as providing infrastructure solutions, divested its stake in Siemens Energy, its turbines production subsidiary, in 2018. Like GE, Siemens has been divesting from some of its subsidiary businesses, one after the other, in a move interpreted by analysts to be more about avoiding the attention of activist investors who have been asking other industrial giants like ABB and Thyssenkrupp to break up for better shareholder returns.

GE and Siemens are only two of the growing number of global conglomerates that have shed, or currently shedding or planning to shed, some of their shareholding in the subsidiaries that are not in their core lines of business. Michele Schechter, a director with Financial Poise, in her paper, Divest to Grow, says that the percentage of companies utilising divestments doubled from 2017 to 2019. Will more businesses in Nigeria, Africa’s largest market, embrace this development?

According to Ernst & Young (EY)’S 2019 annual survey of corporate and private equity executives, 84 percent of global companies are planning divestment by way of the partial or full disposal of company’s assets or a business unit through a sale, exchange, closure, or bankruptcy within the next two years. The survey shows an upward swing in the trend from the 49 percent that responded in this category in 2017. The survey also indicates that companies are turning to divestment in record numbers because divestment is seen as a reliable route to corporate growth by many corporate leaders. Why has divestment suddenly become the toast of most conglomerates across the world?

One of the most recurring reasons companies give for divestment is to enable them streamline their operations. The past couple of years have seen a sustained pattern towards de-conglomeration, a tendency towards core business focus in the global business community. While diversification has some cost-saving benefits, it is becoming more apparent that it also comes at some heavy costs in the form of limited agility and poor corporate valuation. Studies have indicated that large conglomerates often operate at a 5- 15 percent discount relative to the sum of their parts.

According to the EY survey, 81 percent of responders say their divestment plans are prompted by the need to streamline their operations – to focus more on their core lines of business and adapt to the ever-changing technological advances and increase their competitiveness. While the divestment activities that GE has carried out in last couple of years are to allow it to focus more on renewable energy, power and aviation, IBM’S divestments are to allow it to acquire Red Hat, which gave them new capabilities in software and technology. Just like IBM, smart global businesses sometimes divest from some businesses to raise liquidity and acquire other businesses to enable them become more competitive in the market.

Companies also go for divestments when they need to sell off redundant business units or a part of their core operations, especially if they are not performing very well, in order to place more focus on the units that are performing better and are more profitable.

Businesses turn to divestment when they need to raise capital for other purposes: acquisition of capabilities to grow their businesses, debts settlement, payment of dividends to shareholders, and so on. The major attraction for raising funds from divestment is that such funds come without interest obligations.

Some divestment are forced on corporate concerns by the government or industry regulators. This happens when new laws, which demand different set of actions from operators, are imposed on them. An example of this was the Indigenisation Decree of 1976 that forced many erstwhile foreign companies in Nigeria to sell parts of their shares to Nigerians. Another example of a regulation which has triggered and may still trigger more divestments in Nigeria is the Regulation on the Scope of Banking Activities & Ancillary Matters, No. 3, 2010 (CBN Reg 3 of 2010) that required banks to, among other things, divest from all non-core commercial banking companies, or transfer their stakes in these companies to a holding company.

No matter the reasons adduced by businesses for divesting, judging by the rate renowned global conglomerates are divesting, it is getting clearer that the future of business lies more in more streamlined, nimble and core-businessfocused operations which offer more value. Part of the attraction lies in less complexity and better profitability than in diversified, highly complex operations that the conglomerate structure offers. The factors seem to weight more on the side of smart business expedience than mere trend. Are Nigerian corporate giants ready to travel this path? Only time will tell.

It is getting clearer that the future of business lies more in more streamlined, nimble and corebusiness-focused operations which offer more value

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