As your organisation grapples with today’s tough business environment and longer term disruption and change, being able to free up funds and concentrate on the strongest parts of your organisation can give you a powerful edge. Restructuring your business portfolio can help put you on the right track by clearing out parts of the business that are underperforming or no longer core. So how can you capitalise on this opportunity?
You’ve come through the jolts of 2020 and 2021. But how do you sustain resilience and competitive relevance now and in a more volatile and uncertain future?
The cushion of readily accessible finance combined with government support kept rates of insolvency in check during the pandemic. But as the support is rolled back and interest rates and inflation climb, your business is likely to be more vulnerable to economic turbulence.
Staying in the game
The immediate challenges are compounded by the need to sustain transformation and keep pace with market developments.
Lockdown disruption has accelerated digitisation and provided the impetus for the development of lean and innovative new business models. This not only requires investment in new technology, but also a rethink of your business, the elements that are primed for growth and areas that are no longer viable.
The consumer, employee and investor push on inclusion, green transition and other environmental, social and governance (ESG) priorities is adding to the momentum for change. Again, some aspects of your business may no longer fit into your longer-term strategic plans as a result. Your performance on ESG overall and within individual divisions could also have a significant influence on your borrowing costs and ability to attract investment.
Outperforming the past
These pressures are compounded by the higher bar of performance and earnings needed to deliver a return and meet repayment costs. A combination of higher interest rates, labour shortages and disrupted supply chains are pushing up overheads. As a result, returning to 2019 performance levels may not be enough to refinance and repay additional debts. The key question is how to outperform 2019 when costs and consumer demand are so challenging.
Rethinking organisational structures
The final piece of this complex jigsaw centres on organisational structures. Factors ranging from tax reform to Brexit are spurring many groups to rethink where they locate their headquarters and run key operations.
Historically, business structures may have been strategically chosen due to tax advantages. For instance, many organisations have established an overseas presence in locations such as Luxembourg. However, these structures are proving more challenging and expensive to maintain following tax reforms that have more stringent requirements for tax residence, governance and substance.
Activist investment
It’s against the backdrop of these short and long-term changes and challenges that business portfolio restructuring can prove so useful.
Restructuring is often viewed as a reactive response to corporate distress. But we’re seeing how proactive restructuring can provide a valuable boost to businesses that are financially healthy at present, but need to clear away non-core operations and step up investment to sustain relevance and competitiveness ahead.
The openings for restructuring are heightened by an influx of activist investment, mostly from the US, which is targeting what investors see as favourable valuations in the UK. This is an opportunity for buyers to breathe fresh life into previously peripheral non-core divisions. Further targets include carbon intensive operations with a limited lifespan as the economy moves to net zero. Green transition can’t be achieved overnight. In the meantime, investors can extract value from a portfolio of divested assets. Some may also want to go further by using their capital resources to turn ‘dirty’ operations into clean and green ones.
Emerging stronger
By selling the non-core element of your business, you can release cash through sale proceeds and allow your management to concentrate their time and resources on high potential elements of your business.
We have seen this in a number of recent deals such as GSK’s demerger of its consumer healthcare division. GSK was able to raise its full-year forecast just days after the consumer health spin-off. We’re also seeing an increase in the spin-off activity as businesses realign their strategies and restructure their portfolio for long-term growth. Examples include GE’s plans to form three independent businesses from its aviation, healthcare and energy divisions.
The market valuations for spun-off operations can often be much higher on a standalone basis and therefore offer a good way to optimise value and speed up return on investment.
Winding up operations
Beyond carve-out and sale, a further option for rationalising costly or complex operations is through a managed exit.
Although often difficult to navigate, winding up operations offers an opportunity to reduce costs and realign your strategy. The latter may be necessitated by external factors including a response to geopolitical events. For example, many businesses have wound down operations in Russia as a result of its invasion of Ukraine. We’ve also seen an increase in managed exits in sectors facing ESG issues such as oil and gas, especially within operations where a shifting approach may be too difficult. Some of these operations may also find it difficult to secure refinancing without major work on their ESG strategy and performance. In other cases, a number of challenges have come together to make the continuation of operations unviable. The automotive sector is a prime example as some operations come up against the twin hurdles of supply chain issues and the need to align with the net zero agenda.
Set up to capitalise
How can you take advantage of these opportunities? Our work underlines the importance of developing rigorous value creation criteria early in the process. When seeking to apply these criteria to business portfolio restructuring, five priorities stand out:
- Determine what stays, what goes and how
- Move fast on closure
- Clarify and promote the value potential
- Mobilise the team
- Consider a managed service option
Determine what stays, what goes and how
With overall business strategy and shareholder returns as the starting point, look closely at your portfolio and establish what is core and non-core.
Your board should then objectively consider the options for dealing with non-core operations within your portfolio to determine whether the best course of action is to fix, sell or close down.
Move fast on closure
If closing down parts of your business, it’s important to do so with speed to reduce losses and to protect your reputation and employee morale.
Clarify and promote the value potential
Pinpoint and promote the value creating potential for the business being sold. This might be growth with adjacent markets or deploying capabilities within consolidated operations.
Sale or spin-off can also provide the catalyst for challenging operational assumptions and realising efficiencies in areas such as headquarters administration and supply chain consolidation.
Mobilise the team
Bring together a team with diverse skill sets to deliver the changes. Key capabilities include the ability to drive effective restructuring and to reduce the impact on other parts of the business.
Consider a managed service option
If you have constraints on resources and time, outsourcing to execution managed services (EMS) can provide a starting point. Harnessing EMS can help to ensure that the restructuring and operational transformation process are managed effectively without impacting the day-to-day running of the business. EMS business partners can also run non-core parts of your business so you can focus on the areas driving the most revenue and growth.
Leaner, greener and more viable
These are difficult market conditions. Restructuring could provide an important part of the solution. By pivoting, divesting and optimising where necessary, you can reduce costs and boost resilience now, while strengthening your ability to compete and create value in the long-term.
To find out more about how business portfolio restructuring can help drive resilience, transformation and growth, contact us.
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