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Why Businesses May Benefit from Divestitures in 2018

By September 26, 2018March 3rd, 2022No Comments
Why Businesses May Benefit from Divestitures in 2018

The Tax Cuts and Jobs Act of 2017 has created unprecedented changes concerning how corporations are taxed, and these changes can—and will—affect many aspects of how businesses operate. Being aware of the latest policy changes is essential as businesses consider their next moves, including one major question: should a business divest?

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Benefits of Divestitures

As some industry experts have noted, there are several key benefits to divestitures that the new tax structure opens up. With these changes, “lower tax rates means a corporate seller will retain a greater portion of the proceeds from the divestiture of a line of business or business unit.” This in turn frees up cash flow for mergers and/or acquisitions.

According to a survey of over 2,000 companies conducted by Bain & Company, “those engaging in focused divestment outperform inactive companies by about 15% over a 10-year period, as measured by total shareholder return (TSR).” But simply choosing to divest units of a business may not be enough; one key consideration is to make an informed decision based on a calculated approach to determine a business’ “core” features—and which features should be let go.

Leaping to take advantage of the lower tax rate to free up resources on non-essential parts of a business may seem tempting, but the best divestiture plans need close attention prior to, during, and after the sale; “many companies’ muscles are not as well-developed with divestitures as they are with acquisitions.” This means developing key partners in the process instead of rushing to action—even amid rapid geopolitical shifts.

Global Trends in Divestment

The 2018 Global Corporate Divestment study, which is based on 900 interviews with senior corporate executives from across the globe, reveals that real change is being driven by the latest tax cuts—fully 80% of those surveyed cite tax policy changes as a “geopolitical driver in their plans to divest.” If a business is unsure whether it should divest, it may be worth noting that over half of those interviewed shared that they feel they held on to assets for “too long” instead of opting to divest. One likely barrier? According to 64% of those interviewed, the challenge of assembling a strong analytics team to inform their divestiture plan can prevent or delay needed portfolio reviews.

The 2017 tax cuts may also empower businesses to take a closer look at how changes in technology may be influencing their decision to divest; roughly three-quarters of those interviewed reported that shifts in tech have “directly influenced” their divestiture plans. With exceptionally low corporate tax rates, now may be an attractive time for businesses to sell features of their company.

Experienced Guidance throughout the Divestiture Process

Keeping pace with an increasingly complex global market is challenging, and staying abreast of the latest changes in tax policies, technology, and best practices is essential to becoming—and remaining—competitive. With a comprehensive suite of global expansion services and solutions, Velocity Global’s team of experts can assist you throughout the divestiture or M&A process—and many other aspects of your global expansion. Contact us today to learn more about how we can assist.